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Part II: Forest Economist Explores Trends and Biz Opportunities
Economic Outlook: Al Schuler, research economist for U.S. Forest Service, discusses certified forests and lumber products, other changes in the forest products industry; conclusion of two-part interview.
By Chaille Brindley
Date Posted: 2/1/2008
†† Last month, the Pallet Enterprise ran the first of a two-part interview with Al Schuler, a research economist for the U.S. Forest Service. This interview looks at the changes taking place in the forest products industry and ways that smart lumber and wood products companies can take advantage of these opportunities.
†† Prior to joining the Forest Service, Al was the manager of economics and market planning for Norbord Industries and a market researcher for Forintek Canada Corporation.
†† This is part two of the interview.
Pallet Enterprise: Major forest products companies are divesting their landholdings. Increasingly, TIMOs and professional management organizations are buying large timber tracks. What kind of impact do you expect to see that will have on the market?
Schuler: Companies that got rid of their land holdings did so because the value of that asset was not reflected in their stock price. Also, they didnít need all that wood any more because there is lots of wood on the open market. Changes in the tax law made these lands worth a lot more to someone other than the major timber companies.
†† The jury is still out. Will the new owners manage the land as well as large industrial landowners? I donít know. But we do know that they have a shorter time horizon. They donít have research capabilities like these major corporations. Mead Westvaco had a fairly significant† research facility in West Virginia, but the existing facility is only† a fraction of what it used to be Ė of course, it too is unloading some of its forest land, so maybe it doesnít need as much forestry research?.
†† Will the new owners do forest management research? Will this affect the supply of wood and the kind of wood that is available in the future? We donít really know. It will take time to accurately answer that question. My opinion is that they are going to be much more opportunistic. The land is going to be broken up and divided into recreational use, housing, and a wide variety of things. This will be done much more so than under the previous owners.
†† The previous industrial landowners would often allow you to hunt on their lands. They did a lot of things that encouraged people to take care of the land. They did this in part because they are fairly visible as public companies. You donít have that sort of leverage as a consumer with the new owners. In my opinion, TIMOs have more freedom to do what they want.
†† In my opinion, these new owners are not going to invest in forest management to the extent that the industrial owners did. Forest management costs a lot of money.†
Pallet Enterprise: Will that have an impact on the amount of timber available?
Schuler: I believe that will have an impact on the quality of timber available. If you donít manage the land, you arenít going to get the quality. That is true for both hardwoods and softwoods. This includes herbicide treatments, protection from deer, putting in fire roads. If you are doing less of that, you are not going to get the quality that you did in the past.
Pallet Enterprise: How will increased automation in the home construction market have an impact on the forest products industry?
Schuler: One of the big problems that we have in the forest products industry and throughout all U.S. manufacturing is a skilled labor shortage that is structural in nature Ė i.e., a long term problem that is getting worse. This is due in part because we have an aging population. You can imagine what labor shortage we would have if we didnít have a fairly liberal labor policy.
†† I am not trying to push immigration here, but we have huge labor shortage problems. Any industry that is labor intensive is looking for ways to do their business with less labor. One of the most labor intensive industries in this country is residential construction Ė both new homes and remodeling. If you go to a building site, there are quite a lot of people who work on one house. Builders are trying to figure out how to build houses with less labor and better quality control. These are things that automation can address.
†† Concepts that were used in pre-fabricated roof trusses are now being extended to panelized wall systems and engineered floor systems. More and more of the house is being built in a factory under conditions where they are not as susceptible to skilled labor issues Ė i.e., the issue can be better managed.
†† The other factor is that there is a lot of waste on a job site. There is about 8,000 lbs. of waste for every single family home built in the United States. Over 3,000 lbs. of that waste is wood products. That means you have to pay to haul the stuff away.
†† When you build more and more of the house in the factory, there is less and less waste. Those are two major drivers in why automation is increasing. You can build a floor system with I-joists instead of a conventional system with 2x8, 2x10 and 2x12. And you are using about 50% less wood. In addition, you can get longer lengths for I-joists and LVL. You can get them up to 40 feet long. You canít get a 40 foot long 2x10 Ė in fact, anything longer than 20í probably comes from British Columbia, and youíll apply a hefty premium for that.
†† There is considerably less labor needed to build that engineered floor or wall system. These are the drivers for why builders and professional re-modelers are changing the way they do their business. You had better start talking to them and figure out what kind of products that they want from you.
†† Things are changing, but it is a slow evolutionary process. It is also causing changes in the distribution chain. These factors have to be considered too. More and more large home builders are buying direct from the mill instead of going through a wholesaler.
†† Builders make money in two ways. One, when they sell the house. Two, when they develop the land. They want to spend more and more time finding land, developing it and marketing the houses. They want to spend less and less time building the house. They are farming out more and more of that process to supply partners.
†† More big builders are handing more of the framing package to a sub contractor or supply partner.
Pallet Enterprise: What are your thoughts on the biomass market and its impact on the economics of the industry?
Schuler: Right now 95% of the ethanol produced in this country comes from corn. That is probably the least efficient way to produce ethanol, but there are significant problems with alternative biofuel options.
†† With wood products, are you going to use residues or low grade round wood? One problem with using wood is that we donít have a real good process for converting wood biomass into ethanol. The production process is fairly complicated. It includes pre-treatment and acid hydrolysis to unlock the cellulose from the lignin because it is not going to do anything for you.
†† Then you have to add expensive enzymes to break the cellulose into sugar and to ferment the sugar into ethanol. The whole process turns out about 45% of the energy in the biomass into alcohol. In an oil refinery, you take 85% of the energy content in crude oil and convert it into a saleable product.
†† In biofuels, it is less than 50% with the current processes. Down the road, biomass offers a lot of potential. Look at what has happened to the corn market. It is a mess. Higher corn prices have increased the cost of producing milk, meat, anything that eats corn. Longer term, corn is probably not the most efficient route to go.
†† I am not sure that we have figured that out yet. Once we do, I think that we will begin to look at wood more seriously. Switch grass is considered by some as a better process than many wood biomass options. Researchers have been working on this issue (converting wood biomass into fuels) for at least 30 or more years. Weyerhaeuser, for example, has recently invested additional monies into biofuels, looking closely at switch grass as well as some other options.†
†† However, until we make some break troughs in the conversion process, I donít think that wood biomass for energy Ė biofuels - will really help the hardwood market in the short term.† The longer term potential, however, is considerable.
Pallet Enterprise: Where does the United States stand as far as forest resources and competitiveness in this new global economy as more countries with timber resources enter the market? How competitive can the U.S. industry be in the future? What are our limitations?
Schuler: The United States is always going to have a competitive advantage when you look at demand in the world for high quality logs. This includes higher valued furniture, flooring, veneer and panel products. The United States has an advantage based on the way we grow these trees. When the trees grow slower, you get more rings per inch. It is generally a better quality whether it is hardwood or softwood.
†† When you look at fast growing plantations and products where quality is not a concern, other areas of the world have an advantage. Examples of these products include medium density fiberboard, particleboard, and commodity pulp and paper products. Many of those products can be made cheaper elsewhere because either the trees grow faster, or there is cheaper labor, or there are fewer regulations.
†† As the standard of living increases around the world, there is going to be an increase in the demand for high quality lumber and wood products. We also have an advantage in some species, such as cherry and walnut. Those species donít grow all over the world. The biggest and best cherry stands in the world are in Pennsylvania.
†† Russia has some hardwood. But it doesnít have real high quality hardwoods that we have here in the USA. Russia has mostly poplar and birch, material that is sold for pulp wood to Scandinavians. The only other place that you see beech and oak in fairly large volumes is Eastern Europe.
†† On a quality basis, the United States is always going to have an advantage, particularly for hardwoods.
Pallet Enterprise: Do you believe environmental certification and sustainability will become more of a factor in the market? Right now it is a concern for some but not all customers.
Schuler: Letís be clear what we are talking about here. Certified material is lumber that comes from well managed or sustainable forests. The big question is, ĎWhen are customers going to demand certified products and just as important, are they going to be willing to pay more for them?í
†† There is a cost involved in certifying forests and forest products Ė establishing a ďchain of custody.Ē Canada has probably gone further than any other country down this route. At least 75-80% of its commercial forest land is under some sort of certification program. The United States is less than that but higher than many other parts of the world.
†† I think certification will catch on, and we will be in pretty decent shape. The reason I believe certification demand will increase is all the illegal logging, forest exploitation, erosion, global warming, that is occurring elsewhere. As standards of living improve worldwide, people are going to be more concerned about global environmental quality because they can afford to.†
†† Down the road, it certainly will increase in popularity. In my opinion, the more land that you have that is certified, the more you will be in the driverís seat. The winners are likely to be Canada, United States and to some extent Europe. The losers will be Russia and China.
†† The biggest illegal logging hot spot in the world is Russia and Southeast Asia. Russia is increasing its log export tax tremendously over the next two years. It is going from 6% to 90% for softwoods over the next two years. Right now it is 20% for hardwoods, and it is going to go to 40% within two years. There are two reasons why Russia is doing this Ė to reduce illegal logging, particularly in the Western part of Russia, and to force more logs to be processed in Russia.
†† Is Russia important? Yes, 40% of the international log trade for softwoods on a volume basis is from Russia. Almost 30% on a volume basis for hardwoods is Russia. This will cause a structural change in global log markets. It is going to increase the cost of logs all over the world. That will create opportunities on the log and lumber side for us.
Pallet Enterprise: What are some things that lumber companies are not thinking about but should be in order to be ready for the future?
Schuler: I donít think there is just one thing. There are lots of opportunities if you are globally competitive.† Change is happening more quickly Ė we have to be aware of what is going on both in the U.S. and outside the U.S. We have to run harder just to stay in the game Ė and get used to it.†
†† Can you supply logs and lumber to the Chinese, the Vietnamese and anybody else that is currently buying logs from Russia? You need to be much more aware what is going on outside our borders. Before globalization, your competition was a sawmill in the next county or state. Today, your competition is in China, South America, all over the world.
†† Another thing is it is getting harder to find and retain good employees. You have to have a good working environment. People donít want to work in an environment that is dirty, noisy, etc. If you go through a sawmill in Scandinavia and one in the United States, most often, there will be a major world of difference.† Worker training is also becoming a key ingredient to success, particularly when we consider that 30% of our current high school students will not graduate.
†† You need to take a hard look at what you are good at and what you are not. And then you have to do what you do better than anyone else.