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Market Update: Industry Concerned for Hardwood Sawmill Health
The current market leaves sawmills in a difficult spot. Sluggish grade markets have driven grade prices down. Log prices have come down, too, but not as fast as grade prices.
By Jeff McBee
Date Posted: 3/1/2008
“Our supplying mills are struggling financially. We could try to cut prices but fear we will put our suppliers out of business. We cannot afford that, either. If we lose any more local mills, it will create more shortage. It’s a vicious cycle, and we are in the middle.”
Those comments from one of our information contacts really is at the heart of the concerns being voiced about the overall health of the sawmill industry.
Sawmill health is the cornerstone of the overall health of the forest products industry. The widespread concern that has become a frequent topic of conversation these days is valid and warranted.
A lot of the concern centers on conditions that mirror those of several years ago when sawmill auction notices seemed to be in everyone’s mailbox on a nearly daily basis.
The poor housing industry has taken a toll on grade markets. The downturn in hardwood grade markets, now nearly a year in, has created concern over the jeopardized health of sawmills – and subsequently the overall health of the forest products industry.
The current market leaves sawmills in a difficult spot. Sluggish grade markets have driven grade prices down. Log prices have come down, too, but not as fast as grade prices. Getting log prices in line with the current market is an easier said than done proposition.
Red oak pricing was declining again, which is not good news for sawmills.
Industrial hardwood markets have provided some of the few bright spots in the current market. In some areas industrial lumber products have been the strength of the market.
Industrial lumber products for domestic oil exploration and excavation, like board road and crane matting, have enjoyed very strong markets. Railties remain a very viable product for sawmills as well. Demand for ties has leveled off after several years of growth. Tie demand is quite strong and is projected to remain strong. Flooring and framestock have both provided solid, steady activity. Blocking for the steel industry has been a stout market as steel prices have rapidly escalated.
The strength of the industrial market in opposition to the weakness in the grade market spells trouble for sawmills. Mills cannot afford to cut logs for industrial material. This is a real problem for many hardwood sawmills east of the Rockies. The depressed grade lumber prices do not justify paying current log prices.
Another strategy is shutting down. Mills have taken extra downtime or lowered production. Many mills are running enough production time to cover essential financial obligations but little more.
The weak grade market has mills looking to conserve cash and cut costs by any means necessary. Often mills are keeping log decks intentionally thin. It is a very risky strategy because weather can make it backfire, but mills have little if any choice.
Standing timber goes unsold, or harvesting is postponed to see if the market can recover.
All of these trends seem to create a self-feeding downward spiral.
All the while, loggers are without sufficient work. In some areas, paper companies have placed bonuses on pulp wood just to keep loggers in the woods.
Not everything is gloom and doom. Durable goods orders for December were very encouraging; they increased 5.2% rise, which is indicative of solid economic growth.
It is no secret that the housing market is the real key to a true turnaround. Economists are projecting that the housing market is expected to improve in the second half of 2008. It would be rather naïve to think that the housing market would return to 2006 levels anytime soon, but any improvement is a step in the right direction.
This election season, more than any other this writer can recall, has been weighing on the economy. So many campaign commercials call for change and fixing the problems, but the problems often start with declining consumer confidence. This turns sleazy campaign ads into self-fulfilling prophecies.
Whether you agree with it or not, the recently passed economic stimulus package is headed to the president’s desk. Its main intent is designed to bolster consumer confidence as much as anything. When the consumer gets off of his wallet, the economy runs better. The whole forest products market could benefit from it.
(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.)