Times Are Hard In the Woods

by John Henry  on Monday, Dec. 8, 2008 12:00 am  

(To see the list of the top timber companies in Arkansas, click here. A spreadsheet version is also available.)

Times in the forest products industry in Arkansas are as hard as the wood they grow and cut and turn into the lumber, furniture and paper.

"We're in a condition that is the worst I've seen since the late 1970s, when data [in the forest products industry] first began to be tracked," said Ray Dillon, chief executive officer of Deltic Timber Corp. of El Dorado, the state's only publicly traded timber company.

Within the past 30 to 45 days, Dillon said, there has been "an unprecedented rapid reduction" in demand for lumber – a drop of more than 60 percent – in an "extremely short period of time" that has left the market oversupplied. And that, he added, makes it "hard to make ends meet. It amazed me that the downturn has been so quick that it locked the economy up."

Sawmills in the state, those processing both hardwood and Southern yellow pine, lost some 3,000 full-time equivalent jobs between June 2006 and March 2008, said Matthew Pelkki, a forestry economist with the University of Arkansas at Monticello.

With a national recession now officially declared, the forest products sector is looking at an even tougher future next year as the Standard & Poor's Ratings Services' outlook for the sector has grown more negative.

With economists seeing no recovery of the housing market in 2009, the forest product companies are hunkering down to survive until better times come along – however far into the future that may be. And it will be interesting to see how all the short-term problems will change the industry in the long term.

The key to the wood products manufacturing side of the market is the housing market, and economists don't expect a recovery in housing until the first quarter of 2010. Pelkki thinks it will be even longer – the fall of 2010 – before the housing market begins to recover. He sees a freefall for the next six to nine months for the entire forest product industry.

"Housing starts must go back to a normal level" before a recovery can begin, Dillon said. Currently there are too many houses on the market, he said, and that excess inventory must be disposed of before builders will begin to build new houses. When the builders start up again, they'll have to order lumber and the mills will recover. But that recovery for the lumber industry may not occur until 2011, Dillon said.

For Dillon and the other wood manufacturers in the state – and throughout the nation – it means "hard work to keep our noses above water," Dillon said.

The depressed housing market will continue to put downward pressure on lumber and plywood prices, according to Forest2Market of Charlotte, N.C., until credit markets loosen up and home prices drop enough to increase sales.

The latest U.S. Forest Service's Lumber Market – Status & Trends report, said demand for pine sawtimber, the primary wood product in building homes, is expected to decline 18 percent from last year.

Jim Crouch, who heads the Jim Crouch & Associates forestry consulting firm at Russellville, agrees that housing holds the key to recovery.

"There's simply no demand right now for boards or OSB," he said. OSB is oriented strand board, an engineered wood product similar to plywood but cheaper and is commonly used as sheathing in walls, floors and roofs.

"No segment of the forest product industry has escaped the downturn," Crouch said. While the sawmills have felt it the hardest, the paper and packaging sector has also collapsed in the past couple of months.

Industry Restructuring

"In the past few years," Crouch said, "the industry has restructured itself. It's more fragmented." A decade ago, most of the large operations were fully integrated, owning timberland, sawmills and paper mills. During downturns, "at least one of those segments would be making money." Now those companies have divested their timberland – International Paper Co., once the largest private landowner in the state, now owns no timberland. Ditto with Georgia-Pacific. – or shed their paper mills or sawmills to focus on what they see as their core business.

And in the current economy, that makes it tougher to hang on, Crouch said.

Pelkki said he thinks the restructuring was short-sighted in a bid to keep shareholders happy, leaving companies with no fallback business when the market takes a hit.

Deltic, which remains a diverse company with timberland, sawmills and real estate, now finds itself in a better position than some in the state.

In its third-quarter report to the Securities & Exchange Commission, in noting a big jump in net income, Dillon said, "The continued depressed environment in the lumber and residential real estate markets, which has been exacerbated by tightened credit markets, have exerted downward pressure on the financial performance of forest products companies, including Deltic. However, the company's positive financial results for the third quarter and the improvement in these results from a year ago reflect the benefit of the quality and diversity of Deltic's assets. ... We continue to believe that owning and operating efficient sawmills is necessary to protect the value of our timberlands by providing a ready outlet for the fiber from our forests."

Still, Dillon said Deltic, like others in the state, has adjusted mill production to match demand by reducing hours and output.

"It going to take deep pockets and staying power" to survive the prolonged recession, he said.

Pelkki said the country will slowly chew its way through the 10- to 11-month inventory of houses, but it could be a couple of years before a return to normalcy.

The Paper Side

On the paper and packaging side of the industry, demand is already down between 5 percent and 10 percent from a year ago, and is expected to decline more next year as the recession continues, according to Standard & Poor's.

U.S. paper and paperboard production dropped 6.5 percent in October from a year ago, according to the latest American Forest & Paper Association statistics. And because paper production is down, pulpwood demand and prices are also down, Forest2Market reports.

That drop in paper and packaging demand has already led companies such as International Paper Co. of Memphis to shut down excess capacity to meet the weaker demand. Last month it closed its mill at Bastrop, La., indefinitely, putting some 550 workers out of a job. IP isn't alone in closing or cutting back production at its facilities and more companies are looking at even deeper cuts or slowdowns in 2009.

The List

The forest products industry is one of the largest in the state, but this year's list of the state's largest companies shows sizeable declines for those in the lumber business and smaller declines for those in the paper business.

Georgia-Pacific LLC of Atlanta continues its reign at the top, employing 3,310 in Arkansas, down about 72 workers from last year. No other company is even half that big.

Moving up to second place this year – not because it has grown so much but because of the declining Arkansas presence of Weyerhaeuser Co. of Federal Way, Wash. – is Evergreen Packaging Group of Memphis, the operator of the former International Paper mill at Pine Bluff. Weyerhaeuser was second last year with 1,150 employees, but this year it has fallen to fourth with 780 workers. The Evergreen mill has 1,200 employees. Evergreen is owned by the Rank Group.

Now in third place is Domtar Corp. of Montreal, with 1,075 workers at its fine paper mill at Ashdown.

Moving up to fifth place is Advanced Environmental Recycling Technologies Inc. of Springdale, the largest of the companies based in Arkansas, with 600 employees.

Other Arkansas-based companies include Anthony Timberlands Inc. of Bearden with 580 workers; Deltic Timber with 486; Bibler Brothers Inc. of Russellville with 180; Anthony Forest Products Co. of El Dorado with 177; and Maxwell Hardwood Flooring of Monticello with 175.

Some Arkansas-based companies, such as Curt Bean Lumber Co. of Glenwood, The Price Cos. of Monticello and Travis Lumber Co. of Mansfield, may well be larger, but they would not respond to requests for employment numbers.

The Industry in Arkansas

Statewide, there are 18.8 million acres of forest land representing approximately 56 percent of the total land base.

Of this, 27 percent is pine, 17 percent is mixed hardwood and pine, 39 percent is upland oak-hickory forests, and the remaining 16 percent are bottomland species including some oak, cypress, cottonwood, and elm.

Private landowners including farmers, ranchers and other individuals own more than 58 percent of the forest land in the state and many actively manage their forest lands.

National forests account for 2.5 million acres of Arkansas' total forested acreage and other federal lands amount to 3.1 million acres.

Private landowners account for 10.6 million acres, while the forest industry has about 4.5 million acres it owns orleasees.

 

 

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