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Market Update: The Sawmills’ Dilemma
Over the past month, many market contacts have begun express concern about the overall health of the sawmill industry. Some report conditions that resemble those of a few years ago, when there was a rash of sawmill auctions.

By S. Jeff McBee
Date Posted: 6/1/2007

   When this column moved from quarterly to monthly recently, the intention was to focus more on regions. However, this month there is a trend in low-grade hardwood markets east of the Rockies that needs to be visited. The topic is sawmill health in current market conditions.

   Over the past month, many market contacts have begun express concern about the overall health of the sawmill industry. Some report conditions that resemble those of a few years ago, when there was a rash of sawmill auctions; it was not unusual then to see three or four auction notices per week. When people begin to see the same type of trends surface, they bear a closer look.

   It is no secret that hardwood grade markets have endured a tough business climate the past year or two. It was first evident in oak markets – both red and white oak were affected. The typical hardwood sawmill usually deals with a log mix that contains around 40% oak.

   As oak prices tumbled, mills worked feverishly to reduce log costs. Reducing log prices is no small task, but log costs are down by roughly 30% or more the past two years.

   This was a good first step. The problem was that the market was fading faster than log costs were reduced. Considering that logs represent 60% of a sawmill’s costs, this is no small problem.

   The above describes the symptoms in the hardwood market. But what exactly is the ailment? Weakness in the housing industry.

   Oak markets did not totally wither overnight – as the housing market seems to have. Part of what helped to prop up oak markets was the flooring industry, where inventory is air-dried before processing.

   As weaker housing demand lingered, other species began to suffer the same weakness. Maple – a staple for cabinet makers — surrendered significant price concessions.

   The upper grades of many species were now hurting. The one bright spot for hardwood sawmills was low-grade hardwood for industrial applications.

   This brings us to the real problem for many hardwood sawmills east of the Rockies. Weaker grade lumber prices in the current market do not justify current log prices. One contact stated matter-of-factly, “You can’t pay $325 for logs and sell product for $300.”

   The housing market has found some stability and even some modest growth. At the very least, this should help stabilize many hardwood grade markets. In fact, flooring has shown some limited strength in recent weeks – not because the flooring market is particularly strong, but because flooring plants have begun to buy defensively after observing the log cost dilemma.

   Industrial hardwood users are carrying the load for sawmills right now. Flooring has provided some decent activity. Framestock has also been in decent demand along with blocking for the steel industry and mining timbers. Railties and switchties always command a prominent spot in the industrial market; the railtie industry remains solidly strong, and some growth is projected. The hottest industrial hardwood item in the current market, however, is board-road/crane-matting. These products for the domestic oil industry pay enough to draw interest from mills way outside their normal market areas.

   These industrial hardwood users compete for low-grade hardwood normally channeled to the pallet industry, drawing material away.

   How are sawmills adapting to the shift in markets? Do any of the strategies answer the problems of product prices not justifying log costs?

   The strategies are not new. Mills can take downtime or reduce production. These strategies have been used through the past winter; mills ran enough production time to cover essential costs but little more. Another strategy has been to focus on lower grade logs while industrial hardwood products are in high demand, but that only lasts a limited time.

   This is the aspect that has troubled lumber buyers in the pallet industry and fostered concern that more sawmills may be auctioned in the near future.

   I don’t believe this is the case. Hardwood pallet lumber buyers have more immediate problems to be concerned about. The two biggest are board-road/crane-matting and railties.

   There is no place where this is more evident than the Gulf Coast states, where supplies of pallet cants and boards have tightened consistently through the spring. Some large scragg mill operations were unable recently to compete for pulp logs in the area. As long as board-road/crane-matting are running $500 per thousand at the mill, it will be difficult for the pallet industry to get its share of needed raw material.

   (Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call (800) 805-0263 and ask for Jeff.)








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