Declining Timber Industry III

Banks are also in layoff mode, slashing jobs that
were once devoted to pumping up the home
construction boom in the U.S. and elsewhere.
Recently, many in the business and financial
community have said that the bust of this boom
was predictable, and many were indeed predicting
it before it hit.

Were job losses in the logging industry equally
predictable???? And why are they reported as if
they were separate trends??
Lance

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” … feeling the effects of the decreased demand for lumber,
plywood and other residential construction materials.”
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Arkansas Online
Tuesday, April 29, 2008

Housing slump taking whack out of logging
Fuel expenses, mill closures double-team timber industry

By Nancy Cole

LITTLE ROCK – As Arkansas sawmills close their
doors in response to the U.S. housing-market
meltdown and chaos in the nation’s mortgage
markets, the ripple effect has spread well beyond
the mill workers.

Loggers, logging-equipment dealers, timberland
owners, and many retail and professional
businesses in south Arkansas also are feeling the
effects of the decreased demand for lumber,
plywood and other residential construction
materials.

Most Arkansas sawmills have trimmed production by
eliminating overtime, cutting shifts or
shortening their work weeks. Ten mills in the
area have closed their doors – either
indefinitely or permanently – since late 2006,
idling morethan 1,800 mill workers. Those
shutdowns have meant reduced demand for timber,
less work for loggers, and fewer and less
valuable timber sales for landowners.

“For every job lost to the sawmill there’s going
to be that job plus one more lost in the general
economy,” said Matthew Pelkki, a forestry
economist at the University of Arkansas at
Monticello.

Greg Wahl, who with his wife, Debbie, owns WD
Logging Inc., based near Antoine in Pike County,
said, “We’re all involved.”

The trend transcends south Arkansas.

The 13 states in the Southeast currently have
about 200 sawmills, and more than 10 percent of
those will likely be weededout, said Pete
Stewart, president of Forest2Market Inc., a
Charlotte, N.C.-based firm that tracks timber
prices across the region.

Wahl, 49, a contract logger for Potlatch Corp.,
said, “There’s no simple solution. We’ve all got
to be more efficient.”

Diesel fuel prices of more than $4 a gallon have
only exacerbated the problems caused by the
current downturn in lumber demand, he said.

Potlatch, which owns about 470,000 acres of pine
timberland in south Arkansas, announced last
month the permanent closure of its Prescott
sawmill in Nevada County, which produces
dimensional lumber. When the mill finally closes
its doors next month, a total of 182 sawmill jobs
will be eliminated.

Timber is especially important in Nevada County,
said Darwin Hendrix, chairman and chief executive
officer of the Bank of Delight, which is based in
neighboring Pike County.

“It’s all we’ve got down here, you know,” Hendrix
said, referring to the timber industry.

“We’ve got some chicken houses and some cattle,
but we’re primarily timber country.”

The difference between a lumber boom and a lumber
bust is easy to see in Prescott, he said.

“Three years ago there were log trucks going by
my window every 15 or 20 minutes, and now,
nothing,” Hendrix said.

The Prescott mill already has stopped buying
sawtimber, cutting log demand in the area by 120
to 140 truckloads per day, Wahl said.

Stewart, of Forest2Market, says the Potlatch
closure is part of a much larger equation.

“Collectively, in that marketplace, demand I’d
say conservatively is down 35 or 40 percent,”
Stewart said.

“The loggers certainly are taking it on the
chin,” he said, but forest landowners also are
seeing a reduction in pine sawtimber demand.

South Arkansas pine stumpage prices, which
reflect the value of standing timber used to make
lumber, averaged more than $50 a ton during the
first quarter of 2006 but fell below $38 a ton
during the first quarter of 2008, according to
Forest2Market.

The firm’s quarterly Arkansas Timber Price
Reports are available at the University of
Arkansas Cooperative Extension Service Web site:
www.arnatural.org/News/Timber_Report/ default.htm.

“Many seasoned folks in this industry say this is
the worst they’ve seen since 1982,” Stewart said.
“The housing market has just fallen flat.”

U.S. housing starts in March fell to a seasonally
adjusted annual rate of 947,000 units, the lowest
level in 17 years, according to the U.S.
Department of Commerce. The decline, from the
latest peak level in housing starts – 2.3 million
units in January 2006 – represents a drop of more
than 58 percent in 26 months.

Foreclosures, boosted by the subprime mortgage
crisis, are adding to the glut of unsold homes,
the inventory of which now represents a 9.6 month
supply, roughly triple the inventory in mid-2005.
Depressed property values are prompting buyers to
hold out for better bargains, further undermining
new construction.

RIPPLE EFFECT

Logging-equipment dealers have been among those
hurt by the depressed lumber industry.

“It’s just a mess,” said David Long, who manages
two Arkansas dealerships for Tidewater Equipment
Co., a Georgia-based firm that sells Tigercat
logging equipment in Pearcy and Warren.

Tidewater was planning to open a third Arkansas
branch – in Prescott – when diesel fuel prices
“went out of sight,” Long said. So, in December,
Tidewater’s plans went into a holding pattern.
Potlatch’s mill closure announcement last month
“was the icing on the cake,” he said.

Instead of selling new equipment, Long is helping
loggers who want to get out the business sell
their used equipment. Last week he attended a
bankruptcy meeting in Texarkana.

“A guy owed us $3,600 in parts for his machine,
and he just threw his hands up and quit and filed
bankruptcy,” Long said.

Despite being some of the most progressive
loggers in the South, Arkansas’ loggers “are
getting weeded out,” he said.

Forestry economist Pelkki agrees.

Entry into the logging business requires $1
million to $1.5 million in capital to buy the
basic equipment, and the firms have tended to be
family-owned, he said.

“When families get out of the business, there are
not a lot of replacements,” said Pelkki, who
worries about a future logger shortage.

Working last week to clearcut approximately 75
acres of 30-year-old loblolly pines on a Potlatch
plantation near Bluff City in northeast Nevada
County, Wahl said his four-man crew is the most
efficient he’s seen since 1980, when he began
logging with his father-in-law. However, the four
logging machines they use – a “feller buncher”
that cuts down trees, a “processor” that cuts off
treetops and de-limbs, a “skidder” that moves the
processed logs to a staging area and a “loader”
that lifts the logs onto a log truck – consume
hundreds of gallons in diesel fuel daily.

Wahl’s feller buncher alone can burn 70 gallons
of off-road diesel fuel in a day, he said. Even
worse was the on-road diesel fuel required by the
four log trucks that were hauling the sawtimber
about 80 miles one-way to Weyerhaeuser Co.’s
Dierks sawmill.

“It’s costing about $400 a day in fuel for each
truck to make three round-trips,” Wahl said.

The average price of on-road diesel fuel in
Arkansas is currently $4.137 a gallon, a 46.6
percent increase when compared with $2.822 a
gallon a year ago, according to AAA. Off-road
diesel fuel is about 40 cents a gallon cheaper,
because of lower state and federal excise taxes.

Despite Wahl’s efficiency, he and most Arkansas
loggers are hampered by quota systems, which
mills tend to impose during market downturns,
Long said.

A state-of-the-art processor “can produce 30 to
40 loads of logs a day,” he said, but “the mills
won’t let them bring that many loads a day,
because they don’t want the logs.”

The one bright spot in logging is the strong
demand for pulpwood, the younger and smaller
trees that are thinned years before a final
harvest, Stewart said. Because so many sawmills
have cut their production, a shortage of chips
for paper mills has developed.

“The price of paper and pulp are at 10-year
highs,” Stewart said. South Arkansas pine
pulpwood prices have more than doubled from $6.42
a ton during the third quarter of 2006 to $13.33
a ton during the first quarter of 2008.

“There is a little window there for the loggers
to move from sawtimber to pulpwood, but it
doesn’t make up for all the difference” because
of pulpwood’s relatively lower value, Stewart
said.

TURNAROUND TIMING

When might lumber markets improve?

Most economists point to late 2009 or spring 2010 at the earliest.

“It doesn’t feel like we’re at a bottom yet,”
Stewart said. “Nobody knows where the bottom is.”

Several key events must occur before a turnaround
is likely, including a decline in the number of
homes in inventory, an increase in housing starts
and a strengthening in the overall economy, he
said.

Southern sawmills produced about 18 billion board
feet of lumber in 2007, and are turning out about
16 billion board feet at an annualized rate,
Stewart said. However, lumber demand currently is
estimated at only about 13 billion board feet.

“So, we’ve got 3 billion board feet that still
needs to be cut out of production,” Stewart said.
The average Southern sawmill cuts about 125
million board feet of lumber a year, so the
equivalent of about 25 sawmills still need to
cease production, he said.

Ray Dillon, president and chief executive officer
of El Doradobased Deltic Timber Corp., which
operates pine sawmills in Ola and Waldo, agrees.

“At current lumber consumption levels, the
industry still needs significant additional
reductions in production to see any real
improvement in market conditions,”Dillon said
last week during a conference call with analysts
discussing Deltic’s first quarter loss of
$368,000.

In a similar call last week, Potlatch reported
that its Prescott mill had lost $2 million during
the first quarter of 2008.

“The main concern for the company is the
continued weakness in housing starts, resulting
in one of the worst markets for wood products in
decades,” said Potlatch Chairman, President and
Chief Executive Officer Michael Covey.

Because the sawmills that remain open tend to be
some of the newest and most efficient mills,
Stewart worries that many of them will “run a lot
longer into the cycle,” thus prolonging the
downturn’s misery.

Economist Pelkki agrees that the policies of some
sawmills tend to exacerbate downturns.

“In their defense, they do it because they’re
trying to keep their work force intact,” he said.

“I think we’ll survive, but the next two years are going to be really ugly.”

Front Section, Pages 1, 7 on 04/29/2008

Copyright © 2008, Arkansas Democrat-Gazette, Inc.
All rights reserved.

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