The Wood and Fiber Supply Chain Experts
Logging Capacity Crisis Looming?
From the September 2009 Forest2Mill newsletter.
Over the course of the last year, there has been much discussion of
the health of the logging industry. How can logging companies maintain profitability in the face of
housing and general economic slumps? What will happen as logging company owners age and the next
generation looks for more lucrative employment? How will logging companies get financing for the
equipment they need to take advantage of new markets.
In its recent update of the Logging Capacity Survey, the
Wood Supply Research Institute (WSRI) has helped
quantify the state of the industry and the potential shortages as the economic recovery takes
shape. According to Daniel Dructor, Executive Vice President of the
American Loggers Council (ALC), the summary of the
update results, which appeared in the Summer 2009 issue of
Forest Operations Review, “nailed down what we’ve been thinking all along.”
A few of these nails include:
- Logging capacity averaged just over 84 percent utilization in 2008.
- If pulp manufacturing capacity neared 100 percent, or if both pulpwood and lumber demand neared 85 percent, a 25 percent shortage of logging capacity would occur.
- Labor availability is a growing problem.
- The willingness and financial ability to expand capacity is low among existing logging companies.
While the full report is not yet available, these initial findings
highlight the issues that will arise for all wood-consuming facilities. The survey found logging
capacity continued to decline 2008, though the impact of this was softened by lower consumption. As
the economy recovers and the bioenergy industry develops, however, competition for loggers may
become more intense than competition for fiber.
Despite the cautionary tale outlined by the Survey results, Dructor and the ALC see
opportunities for loggers in this report. “The information in this report provides an opportunity
for industry participants to work together to solve the problem. For instance, one way to address
the shortage is for buyers to negotiate longer term deals with their suppliers. Long-term supply
agreements—say 3 to 5 years—will help stabilize logging businesses. With the ups and downs of the
traditional industry, it has been nearly impossible to do that. With longer term contracts, loggers
can establish better business models, including setting up timetables for equipment replacement.”
For Dructor, one of the keys to dealing with the shortage is resolving profitability issues.
According to the WSRI, the average age of a logging business owner is 51 years. Many of these
businesses will not survive past the owner’s retirement. “As the world has become more
business-oriented, those who might have taken up the profession out of a sense of enjoyment or
legacy have gravitated toward other work. How do you attract new people into an industry where
equipment and worker’s compensation payments leave you with a profit margin of 2 percent or less?"
Increased competition will help ease this pressure, according to Dructor. In many wood
basins, mergers and acquisitions have left only one or two major purchasers of wood. In this kind
of a market, negotiating positions are far from equal. As bioenergy companies begin operations,
this should help markets operate more freely. “Competition resolves a lot,” said Dructor. Whether
BCAP will help or not, depends: “The program really isn’t funded well enough, and it’s only for two
years. That’s not long enough to stabilize the market. Plus, we don’t know yet who will actually
get the money.”
Bioenergy is clearly having an effect though. The key moment in a project’s life is when
ground is broken. It’s at this point that loggers will be willing to enter into long-term supply
agreements so that projects are easier to fund. In some of these cases, loggers have already
purchased the equipment they need to collect, store and transport biomass, and they are and
stockpiling it until the facility comes on line.
In the meantime, Dructor says, the American Loggers Council is recommending that it’s
members keep an open mind and carefully consider new opportunities. One idea: biomass could be
paid for on its energy value instead of its wood or paper products value, by the BTU and not by the
green ton. Another idea: when your markets are declining, create new ones. Some of the ALC’s
members have begun investing in pellet plants, for instance, not waiting for others to build them.
In the end, Dructor says, “markets take care of themselves. If everyone in the supply chain
would work together to stem the logging capacity shortage, I think we will find that the
market will take care of us all.”