Americaís Future in the Global Forest Products Industry
Dr. Douglas Parsonson, an expert in lumber markets, discusses Americaís future in the global forest products industry.
By Chaille Brindley
Date Posted: 3/1/2006
††† Increasingly the world is becoming a smaller place as goods are ending up around the world instead of just simply down the street. The United States remains the largest wood market in the world. It is also one of the largest producers of wood products and lumber. But the global industry is changing as new players come online. What will the future hold for the U.S. industry?
††† Pallet Enterprise, assistant publisher, Chaille Brindley, discussed these and other issues with† Douglas Parsonson, a market specialist with Jaakko Poyry Consulting Inc. Doug has covered the global industry for years and provides a unique perspective on what the future holds. †
†Pallet Enterprise: A recent report by TimberMart concluded that there has been a steep decline in demand for U.S. timber products. Do you agree that this is a true assessment of the market?
†Doug: Several factors have contributed to this decrease in U.S. timber and solid wood exports. First, domestic demand has increased, absorbing materials that were previously exported. Second, the capability of many offshore producers has grown. Other regions can now service markets that were formerly supplied by the United States. For example, countries within Europe, such as Austria, are now supplying European markets. These countries are also exporting more into Japan, which used to be a major market for the United States. European markets are also being serviced by the former Eastern Block countries, especially those in the Baltic region. Third, U.S. exports were really impacted when the government made large areas of the Pacific Northwest off limits in order to protect the Spotted Owl.
†Pallet Enterprise: Is there much that the U.S. market can do to gain its competitiveness? Or is this more of a permanent shift in the trade landscape, something that the U.S. industry is just going to have to accept?
†Doug: The export markets were useful in days gone by as a way of taking care of excess capacity during period of lower domestic demand. However, today domestic demand is huge. The U.S. is a big importer of lumber products, especially from Canada† and increasingly from Europe and Chile. My sense is that the domestic markets will continue to be very strong with enough demand to keep U.S. producers happy.† Notwithstanding this, a few specialty products out of the West Coast do have export potential. For example, the Pacific Rim still has an appetite for some of the Douglas Fir products.
†Pallet Enterprise: Are you seeing more wood products being used around the world because in some places wood has not been a major building product? Is this changing or staying the same?
†Doug: there are no places where wood is as prevalent in construction as in North America. You do see it in some countries like Australia where wood framing is used in houses and wood is used in roofing. But you donít have the same level of structural panels. There, the external wall of the house will be a single skin of brick with sheet rock as the internal wall. In many countries, especially in Latin America, masonry is the norm. There have been a few isolated areas where we are seeing some changes. For example, Louisiana Pacific has set up an OSB manufacturing facility in Chile. They are working with local builders to use more OSB in† low cost housing. They have met with some success in doing that. As a sidebar to that example, the framing used in those homes is actually steel studs. So they are using more wood, but† it doesnít include wood framing.
††† If you look at Europe again, the market heavily favors masonry. Wood is used in fitting out interior, roofing and flooring. But the main structure of the house is typically masonry.
†Pallet Enterprise: Is that because of price or availability? What are the main driving factors behind the places in the world where wood has not been as heavily used?††††
†Doug: I think a lot of it is tradition. People build houses in a certain way because that is what they are used to. The perception is that masonry is there for the long term; wood houses may be seen as flimsier and therefore, worth less. Also, in other parts of the world, people donít have the same mindset about houses as in the United States. Here itís not unusual for a house to be changed or taken down and replaced within a number of years. So you could say the main factors are how people view their house, the longevity of the house, and the tradition of how builders have learned to build homes. Using new materials is something that builders have to learn.
†Pallet Enterprise: In a recent presentation, you said that Russia has a lot of untapped timber and they are starting to get more infrastructure in place to start taking advantage of that natural resource. How is Russiaís emergence going to impact the market? Could Russia quickly become a major competitor to North Americaís dominance?
†Doug: Russiaís impact is being felt in a couple of key areas. One of them is as a source of raw wood into China and the Nordic countries of Finland and Sweden. Russia has been sending more logs into China. The Russian government is increasingly looking to attract more investment into sawmills and pulp mills. We would expect to see more Russian sawn wood entering the market. That will be primarily directed at Europe. It will have the effect of driving whoever is servicing European markets today to look for more markets in other areas. Ultimately, some of that displaced lumber will come to roost in the United States because the U.S.is the biggest market. According to our analysis, we could see Russian wood landing in the United States and being very competitive here.
†Pallet Enterprise: Really, is that mainly on the West Coast?††††††
†Doug: Well, on both coasts because Russia is pretty much as close to the East Coast as it is to the West Coast. You are just dealing with different ends of the country. The analyses we have done show potential for a player in the middle of Russia to be able to service the middle of the U.S. and be very competitive. Russia has some great wood, with trees like the U.S. had about 100 years ago. Large trees with very attractive wood properties Ė close and straight grain. The tough part is that the forests are a long way from anywhere. Russia has been working on improving the logistics, especially trying to get the rail system working more efficiently.
†Pallet Enterprise: In the U.S., we are starting to see Radiata Pine coming out of South America. Increasingly should we start to see more mills and pallet operations looking to South America as a viable source of lumber? Or is this only the case for those with close access to the gulf?
†Doug: Anyone who has access to import ports could see that product coming up because there will be a lot of it produced. There are significant increases in the Chilean harvest potential. They have put in place new and expanded pulp and panel mills to take advantage of the residuals of sawmilling. They are unable to sell into domestic structural markets so they are looking for whatever other markets are available to them.
†Pallet Enterprise: In the U.S. we have seen more sawmills going out of business and the aging of the logging population. Increasingly a lot of land has been placed off limits for environmental protection. Mills are getting more efficient as medium sized companies go away. Are these trends that you have seen? What is your viewpoint on those aspects of the U.S. market?
†Doug: If we look at mills going out of business, definitely the smaller mills have been and will be challenged in the next downturn in demand. That is an issue of scale more than anything else. It is completely an issue of their cost competitiveness versus the big mills that are being put in the United States and Canada.
††† The availability of loggers is a big issue. Loggers are doing it tough. The guys who really know their business are still profitable. But a lot of loggers are not. Many are just consuming their capital staying in business. You can only do that for so long and then you are out. That is a big strategic issue for the whole forest products industry not just in the U.S. south. This applies to Canada as well. The logging business has not been a good business. It is tough to see new capital coming in and to be able to earn the cost of capital.
††† In the southern U.S., urbanization is probably the biggest risk to the loss of timber land. This is a much larger factor than even environmental concerns. Timber land is bought and developed for housing. And people donít cut down trees in their back yard.
††† The Sustainable Forestry Initiative (SFI) has put more constraints about when and where you can log. And during wet years, you wonít get into some places when you used to get into them. And that is going to increase the cost during those wet years. You will be able to harvest. Itís just that you will be waiting for dry years to do it. Those factors overall will add cost to the whole equation.
†Pallet Enterprise: The U.N. publishes a global forest resources assessment from the Food and Agriculture Organization. They have come out saying that deforestation is continuing at an alarming rate. The United States is one of the major countries that has been eliminating primary forests. Do you concur with their assessment?
†Doug: I disagree. I donít know what they mean by primary forests. But I would say that the trend in the United States, with the exception of urbanization, is to increase the total amount of forest. If you look at the statistics, the area of forests has been increasing for decades. It all depends on what they mean by primary forests.
Pallet†Enterprise: The U.Nís definition of primary forests is a forest of native species where there are clearly no visible indications of human activity and the ecological processes are not disturbed.
†Doug: In that case, they are probably right. The East Coast forests have all been cut down probably three or four times. There is continuing activity on the West Coast in forests that have not been cut before.
††† If you take a broader view of forests and take a look at overall cover, the United States is actually increasing the area of forests. You see more farmland that is going back to forested land.
†Pallet Enterprise: What import markets hold the most potential for U.S. exports?
†Doug: China is certainly one of those markets. China has a lot of domestic demand as well as demand for manufacturing products that are eventually exported. Japanís economy is again showing signs of life and we can expect increased demand showing up there as well. Finally, the Mexican market remains a natural focus for US Producers. Those are the two largest areas of potential for U.S. wood products.
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