Despite Lower Demand, Pulpwood Prices Remain High in the Northeast

The Northeast has experienced a loss of markets for pulpwood over the last few years. In 2013, the Great Northern Paper mill in East Millinocket, Maine closed its doors and in 2014, Verso’s mill in Bucksport, Maine shuttered forever. The closing of these two mills alone has resulted in a permanent loss of over a million tons of pulpwood demand annually.

What we haven’t seen in the market as a result of these closures is a corresponding drop in price (note the graph below). Basic economics – the law of supply and demand – dictates that all other things being constant, the loss of markets should result in a price decrease. The economist in me draws one conclusion in this case: all other things simply are not constant.

Based on price reactions and current market dynamics in the Northeast, it’s pretty clear that there isn’t a single reason that pulpwood prices have remained strong while demand has dropped. Rather, a confluence of events is at work in the region:

• Logging Capacity: We have lost logging capacity and will lose more. While large, integrated loggers usually survive a mill closure and diversify their sales through a number of markets, smaller loggers often disappear when a mill does. Some of these loggers are only capable of turning out a handful of loads per week. In the big picture, their impact on the larger industry appears to be minimal; when enough of these small loggers disappear, however, it can be a big deal. Likewise, the trucking sector is also beginning to experience the same challenges. 

• Capacity Creep: While the region has lost pulp mills, remaining mill operations have gained new demand through capacity creep. Many mills are working hard to make their machines run above nameplate capacity and the result has been increased wood use at a number of existing mills. 

• Market Diversification: Northeastern loggers, landowners and foresters are diversifying their markets. A few years ago, a “diversified” supplier may have had two markets for low-grade wood. Now, that same supplier may have five or six markets to maintain a comfortable level of diversification. 

• Product Diversification: Pulp isn’t the only game in town. During the same period that the region lost two paper mills, it gained a new biomass plant in New Hampshire with an average annual consumption of 750,000 tons of fuel. Over the last few years, wood pellet mills have been successful, and the region has even experienced a few periods of “shortages” of wood pellets and dried firewood. Every ton of pellets or cord of firewood delivered to heat someone’s home is a ton of wood that a pulp mill won’t utilize. 

• Weather: The last few years have been marked by weather extremes that have wreaked havoc on productivity. The weather has been unusually volatile for the region, which has affected supply during times of the year that are historically high-demand and critical for inventory building. The cumulative impact of these unreliable weather patterns has further exacerbated upward price pressures.

Because there is no single cause associated with the high pulpwood prices in the Northeast, there is also no single event that will likely bring these prices back down. A 50 percent decline in the price of oil combined with a million-ton drop in demand hasn’t been enough to lower prices. The truth is that the Northeast has some of the highest fiber prices in North America, and it’s only a matter of time before more demand exits the marketplace. It is more critical than ever for both suppliers and consuming mills in the Northeast to optimize the wood fiber supply chain. A focus on overall supply chain value rather than on single components will help the entire industry remain competitive and prosperous.