Mills Struggle In Weak Housing Market

Uncertainty and market volatility in the forest products industry caused by the residential housing sector is likely to force lumber mills in the South to cut production or shut down for extended periods of time.

The problem is multifaceted, and it affects everyone in the industry, said Scott Twillmann, senior analyst for Forest2Market. Lumber markets are suffering because of the housing crisis, and reports indicate that residential construction will continue to decline before it begins to recover.

Meanwhile the wet season is approaching, which usually runs from December through the end of spring and brings difficult logging conditions. Also, questions remain about the amount of premiums historically placed on accessible tracts of timberland that can be logged year-round.

“Mills, which are already operating at a loss, can’t sell their product for what they need because the demand for lumber is weak, and they can’t afford higher raw material costs” Twillmann said. “So, I would expect to see extended curtailments of production.”

Suppliers are also caught in the squeeze. The decline in residential construction has caused stumpage prices – the value of standing timber – to fall so far that sellers have been pulling tracts off the market for the last four or five months

“One advantage to owning timberland is that you don’t have to sell it like you would with corn or cotton,” Twillmann said. “Owners have been waiting until market conditions rebound so they can sell their stands for what they feel they’re worth.”

Suppliers are running out of tracts of timber that they have contracted to harvest and deliver to mills. It’s too costly for suppliers to idle their equipment, so they have traditionally paid premiums during the wet season for all-weather tracts. As a result, suppliers could find themselves in a bidding war for the all-weather tracts that they can access.

“Right now, suppliers are working to keep their equipment moving and break even, but they can’t afford higher premiums either,” Twillmann said.

However, this year is different than previous years. If sellers charge premiums, suppliers will have to find other areas to reduce costs, which will be extremely difficult. Raw material costs are already expected to rise because the price of diesel is increasing, further limiting logging operations and the distance suppliers are willing to travel to deliver their product to mills.

Something is going to have to give,” Twillmann said. “The situation is bad all around, and it’s driven by residential housing.

The stumpage price increase that owners of all-weather tracts have been waiting for may never occur. As mills cut production because of weak demand, landowners may not be able to charge a premium because no one will pay for it. This market uncertainty and volatility is expected to last until the residential housing market recovers.