A Glimpse into 2008

Challenges Ahead: Industry Shifts and 'Green' Energy Pose Danger and Opportunity

Evidence suggests that the traditional forest products industry is on life support. A massive transition from corporate to institutional timberland ownership, migration of manufacturing assets from publicly held to privately held ownership and an influx of foreign owners are all signals that the market is allocating assets to the natural economic owner who is able to squeeze ever last ounce of efficiency and profit out of the system. Oh! Let’s not forget Wall Street’s utter distain for the industry. This could not have been more clearly demonstrated than when Wall Street browbeat International Paper to divest its timberlands and solid wood business to focus on paper. IP acquiesced to Wall Street’s demands, but received no recognition in return. Today, IP’s stock price is lower than it was prior to the massive asset sale.

No doubt Wall Street’s snub of IP is driving internal decisions at Weyerhaeuser. It is very clear that Wall Street does not and has never rewarded forest products companies. As the old saying goes…with friends like that, who needs enemies? We will likely see more privatization in 2008.

Even as the traditional industry falls further out of favor, new opportunities are brewing. Carbon credits, cellulosic ethanol and wood fuels are developing into the real deal. Speaking as one who owned a fledgling business during the “dotcom” boom, there are frightening, as well as comforting similarities. A fantastic amount of private equity money is flowing into these three sectors, along with liberal federal and state subsidies. Yes, many investors will lose their shirts, just as during the “dot com” crash. It cannot be denied, however, that this movement is picking up steam.

This movement opens a huge opportunity and poses a tremendous challenge to the forest and forest products industry. The opportunity is rooted in the industry’s ready infrastructure—its wood procurement systems, technical and engineering expertise, capital and just plain experience. Within the industry, some argue that government subsidies pose an unfair advantage to new technologies that will compete for the same wood raw material. Yes, that is and will continue to be true. While I appreciate the argument and believe the industry should push for fair legislation, I would much rather see the industry exploit these “unfair” subsidies.

Think how perfectly positioned a pulp mill on the east coast is to guide this industry. Who better to provide a community with electricity generated from a CHP plant? The mill has port access, an existing wood procurement system, access to rail and a lot of experience shipping material all over the world. Not to mention, it already has access to cheap capital. The same could be said for a mill interested in supporting wood pellets or cellulosic ethanol.

I opened this editorial with the thought that the traditional forest products industry is on life support. Perhaps these new opportunities could revive it. Better utilization of wood raw materials benefits everyone.

Let’s not replay the ‘growing pains’ experienced by the industry due to the rise of the sustainable forestry movement in the early 1990s. Even today, it is an absolute cost for everyone involved. Now is the time to secure raw material supplies for the future—but it is also the time to take advantage of ideas about wood and energy which we have known for years: wood is a clean, efficient way to produce energy.

These new trends, along with increasing world demand for forest products, will put unprecedented demand on the forest resources and shine a bright light on our industry—a good thing. At the same time, environmental pressures and timberland ownership changes are effectively limiting the amount of supply. Surely, these forces will negatively impact the economics of traditional manufactures, but they will also present opportunities for those willing to change and embrace the new trends.

The change will occur with or without the blessing of the industry. Will it take ten years to convince ourselves that our inaction not only denied us a huge opportunity, but also severely threatened our traditional business?

2008 is full of opportunity. Speaking on behalf of Forest2Market®, we plan to take advantage of the opportunities presented and show our customers how to exploit them.

To that end, Forest2Market® has developed expertise and products in two of these new markets: wood fuels and carbon credits. As with all F2M® offerings, they are unique, powerful and customer centric.

We will roll out these new products during the first quarter of 2008. Stay tuned. I know you will be pleased.

Best wishes for a great 2008 and thanks for your business. It will be fun.