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Thinking Ahead–Letter from Chaille: Uncertain Times
Publisher Chaille Brindley tries to get his head around the many uncertainties that are plaguing the industry and overall U.S. economy right now with an eye toward the future.
By Chaille M. Brindley
Date Posted: 5/1/2010
It was the best of times. It was the most uncertain of times. While this may seem like an irreconcilable contradiction, it is an accurate depiction of the current state of the industry. There are many unknowns, and I am talking about more than just the recovery of the U.S. economy. There are many shifts taking place that could forever impact the pallet, packaging and lumber industries.
These uncertainties have caused sleepless nights for many business owners and managers. Yet, these uncertainties also present opportunities for smart business leaders who make the right decisions now to prepare for the future.
The hard part is that nobody knows what will happen in many of these issues. But that doesn’t mean you should sit on the sidelines. You must do your best to think ahead, analyze the present to predict the future and try to make smart decisions now. Sometimes that will involve risks. Because after all, that’s what building a business is all about. You can’t win big unless you take some risks in the business world.
Here’s a litany of the uncertainties that keep me preoccupied as I think about the future. One of the biggest concerns is the future of the raw material supply of the forest products industries. Numerous factors point to reduced domestic supplies and increased competition for it. This includes invasive species destroying habitat, contraction in the number of sawmills and loggers, continued pressure to restrict logging on public land, and the growth of biomass markets. Some of these indicate future business opportunities and may allow for increased margins in the future as a glut of players has plagued some aspects of the forest products supply chain.
Depending on what you believe about global warming, erratic weather patterns could make getting logs out of the forest difficult if the country faces more harsh winters caused by El Nino climate patterns. Currently, the hardwood lumber market is experiencing a severe shortage of material as heavy snows combined with low inventory levels have hampered winter lumber production. Cant prices are reaching historic highs in some parts of the country. See Jeff McBee’s market column on page 62, to read more about this current trend.
Even worse than the contraction in the number of sawmills is the reduction in logging capacity. While this is nothing new, trends appear to be getting worse as young people flock toward healthcare, high tech and service sector jobs. If you have never seen it, the TV show Axe Men on the History Channel has highlighted the primary drivers causing the shortage. Logging is one of the most hazardous occupations in the country. Worker’s compensation insurance alone is astronomical just to cover a logging crew. Many times it can be difficult for a logging operation to afford to pay the crew and the note on the equipment. Weather, legal challenges, machinery malfunctions, difficult environmental conditions and tight margins make for a very difficult business proposition. It takes a hearty soul to be a logger.
Increasingly it is difficult to get access to some timber sources, especially federal forests. The Obama administration has signaled that its top priority for the Forest Service is a “greener” role. New Forest Service Chief Tom Tidwell said that the agency will follow a new vision with a focus on climate change and forest health. He explained, “The Forest Service focus on restoration will be closely tied to landscape-scale conservation. Especially in an era of climate change, we need to restore the resilience of America’s forests to disturbances of all kinds. The treatments needed will improve watershed health, increase water quality, build community prosperity, and meet our shared vision of healthy sustainable forests.”
This vision toward healthy forests sounds good in a sense because America’s public forests are not in good shape. Active management needs to reverse decades of mismanagement. The problem with Tidwell’s comments is what is absent from the vision cast by the new leader. There is little said about multiple-use, providing the country with suitable timber resources, or working with communities dependent on the forest products industry for economic survival. Don’t look for any increase in timber supplies coming from federal lands.
On a more positive note, biomass markets offer significant profit potential. However, there are many hurdles, and there may not be as much money in wood waste as some people first thought. It’s like anything. You can do it right and make some money. You can do it wrong and lose your shirt. There is a lot of uncertainty in how biomass credits issued by the federal government will impact markets. And some of the most promising biomass technologies have yet to really catch on.
Globalization offers tremendous opportunity, especially for U.S. hardwoods. The difficult thing is knowing how best to take advantage of those opportunities and compete with foreign timber sources, especially in eastern Europe.
The success of the forest products industry has been tied to the state of the housing market for decades. Some experts believe the housing market has yet to hit the real bottom, which could come later this year when tax incentives expire. Thus, housing may take a lot longer to rebound than most have figured. This could further put strain on sawmills and lumber re-manufacturers.
Looking at pallets, a major challenge is the aging status of the GMA, white wood pallet pool in the United States. More and more wood keeps getting taken out of pallets in the name of lower costs, which is impacting the overall quality of used pallets. Major shippers and product manufacturers are using increased automation that has ratcheted up performance requirements. iGPS offers a high quality, plastic pallet pool and CHEP is spending millions to improve the quality of its blue wood pallet pool. The competition keeps improving its quality while the white wood pool heads in the other direction. Sooner or later, quality has to become a major concern for everyone.
Leaders in the industry are talking about developing a tight quality specification for a new pool, modeled somewhat after what the Europeans did with its EPAL standard. I covered the economics of this system, known as PIMS, in the April issue of the Enterprise. The numbers are there. The key hurdle is paying for the development of the pool. Finding a solution to pallet rental is a key if the white wood industry wants to take back market share and ensure its survival in the grocery sector.
Led by iGPS, wood pallet alternatives continue to make waves with customers. From food safety, to fire safety to environmental friendliness, the competition keeps on getting fiercer with each passing day. Read the article on page 40 to see how decisions by Walmart could impact retail packaging and pallet trends.
Overall, there are many big question marks in the general business environment. What kind of impact will higher taxes and the new healthcare reforms have on small businesses? How high will Obama increase taxes to pay for new government programs? What will government spending do to interest rates? How high will those rates go and what will this do as far as the private capital investment markets?
Will signs of a global recovery free OPEC to raise oil prices? Could surging oil prices of late cause a boomerang effect? Most pallet companies continue to talk about positive signs of growing orders. Most economists continue to speculate that the recession is over. But there are some who point to hurdles ahead.
With all these uncertainties and a lot more that I didn’t mention on our minds, what’s an entrepreneur to do? The answer is simple. Cut unnecessary costs while spending more on areas that look promising in the future. The worst thing you can do is fail to plan and adapt for the future. Then, you really will be at the mercy of the market and your competition.