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Blog

Pacific Northwest Must Seek New Path Out of the Current Crisis

March 06, 2008
Author: Suz-Anne Kinney

The Pacific Northwest forest products industry, riding the current swell of unprecedented foreclosure rates, must make strategic cuts to mitigate the effects of the current credit crisis. Evidence of such decisions is rampant. Mills are shutting down throughout the Pacific Northwest, and thousands of jobs are at risk. Although the recession of the early 1980s drove lumber prices down similarly to levels we have seen recently, this latest tempest is unlike any we have lived through before. The strategies mills and timberland owners will use to stay afloat today must differ radically from those in the past.

In the 1980s, mortgage interest rates that rose to the double digits drove lumber prices down. When the market crashed in 1982, Douglas Fir logs plummeted from $350 per 1,000 board feet to about $250. Over the past twelve months, Douglas Fir log prices have also dropped by one-quarter to $500 per 1,000 board feet and in many cases even less.

At that time, the U.S. Forest Service, which accounted for approximately 50 percent annual harvests in the Pacific Northwest, life-boated the forest industry, buoying sawmills with cheap timber until the last squalls dissipated. The U.S. Forest Service accelerated immediate harvests to bring cheaper logs to market and extended supply contracts to mills allowing them to harvest timber when prices rebounded. Sawmills turned to cheaper private stands to offset lower lumber profits, and by the end of 1983, private timber harvests had risen by 30 percent. Eventually the market turned, but raw material procurement systems were changed fundamentally.

Today, mills can no longer rely on the monolithic powers of the U.S. Forest Service to carry them to safe harbor. Socially-driven government policy has reduced the share of federal harvests 80 percent below former levels. Non-industrial private timber owners, who own far less timber acreage than the U.S. Forest Service, today contribute as much timber to annual harvests. Additionally, timber investment management organizations and real estate investment trusts dominate ownership of industrial forestlands.

Changes in the industry and the nature of the current crisis preclude earlier strategies used to sustain the PNW forest products industry. Despite significant improvements in production efficiency, with mills able to recover one-third more lumber from 1,000 board feet of logs, mills face tighter profit margins. Lumber prices that have dropped to levels not seen since the 1980s, coupled with raw materials costs that have doubled, leave little room for mills to maneuver. As a result of the current debacle, lumber production has decreased in the PNW by nearly 13 percent. Cautious mill buyers appear content to live with tight log inventories, and operators will likely continue this close-to-the-vest philosophy. Furthermore, today’s timberland owners are less willing to sell logs into a depressed market. Timber harvests in Oregon alone have fallen by as much as 12 percent.

Whereas in the past sawmills needed to wait only for interest rates to lower before ramping up production, today we must hold on until the glut of houses has been reduced before lumber demand will become even-keel once more. 

Most projections indicate recovery will be elusive until 2009. Housing starts dropped more than 30 percent from peak levels in 2005, and the inventory of unsold homes climbed to a record high. Questions abound as the industry faces uncharted waters, reeling from low demand and uncertain timber supply. On a positive note, the weak dollar is near parity with the Canadian dollar for the first time since 1976, which has buoyed U.S. lumber mills and kept the industry afloat. When the upturn begins, the first indications of recovery – increased home sales and decreased monthly inventories – will be a welcomed sign.

Gordon Culberson works in Eugene, Ore., as the Pacific Northwest region manager for Forest2Market, a price information data provider based in Charlotte, N.C. Culbertson has more than thirty years of experience in the Western forest industry.

Links:

  • Gordon Culbertson, Pacific Northwest Region manager
  • PNW Delivered Price/Mill Benchmark Service

Suz-Anne Kinney: +1 980 233 4021 or suz-anne.kinney@forest2market.com
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