Southeast Conference TLMP Comments April Appendix 3.

Transcription

1 Southeast Conference TLMP Comments April 2007 Appendix 3. LEVEL OF HARVEST CAPABILITY REQUIRED TO SUPPORT AN INTEGRATED FOREST PRODUCTS INDUSTRY IN SOUTHEAST ALASKA FINAL REPORT PREPARED FOR: SOUTHEAST CONFERENCE April 2007 Cascade Appraisal Services, Inc. Forest Consultants/Industrial Appraisers Wilsonville, Oregon

2 LEVEL OF HARVEST CAPABILITY REQUIRED TO SUPPORT AN INTEGRATEDFOREST PRODUCTSINDUSTRY INSOUTHEAST ALASKA FINAL REPORT PREPARED FOR: SOUTHEAST CONFERENCE April 2007 Cascade Appraisal Services, Inc. Forest Consultants/Industrial Appraisers Wilsonville, Oregon

3 CONTENT Executive Summary... 1 Introduction... 3 Current Situation... 4 Timber Ownership... 4 Public vs. Private Timber... 4 Timber Harvesting... 5 Current Harvesting Capacity... 7 Industry Mill Capacity... 8 Timber Markets... 8 Integrated Future Markets Required Harvest Capacity Equipment Economics Logging Costs and Investment Logging cost Estimate Investment Bibliography List of Tables Table 1 Estimated Forest and Timber Land Area... 4 Table 2 Tongass National Forest Timber Offered, Sold and Harvested. 6 Table 3 Current Harvesting Capacity... 7 Table 4 Timber Area Selection Table 5 Estimated Logging Costs Table 6 Logging Sides Required to Harvest ±360 MMBF/Year List of Figures Figure 1 Timber sold and Harvested on the Tongass National Forest... 5 Figure 2 Southeast Alaska Sawmill Utilized Capacity, Figure 3 Japanese Lumber Import Volume 1961 through Figure 4 Japan Lumber Import Volume by Exporting Nation, Figure 5 Alaska All Softwood Lumber Export volume and Value By Destination, 1989 through Figure 6 Lumber Price Index Compared to Puget Sound Delivered Log Values January 1989-February Figure 7 Wood Chip Imports Japan 1961 to Figure 8 Wood Chip Imports China, Korea and Taiwan 1961 to Figure 9 Wood Chip Exports Selected Countries 1964 to ii

4 LEVEL OF HARVEST CAPABILITY REQUIRED TO SUPPORT AN INTEGRATED FOREST PRODUCTS INDUSTRY IN SOUTHEAST ALASKA EXECUTIVE SUMMARY During the second half of the twentieth century Southeast Alaska (SEA) supported a fully integrated forest products industry. In 1994 and 1997 the region s two pulp mills that utilized sawmill chips and the low grade hemlock and spruce logs that are suitable for fiber products closed. The obvious impact of the pulp mill closures was a loss of jobs in the mills and in the supporting logging and service sectors. The loss of markets for pulp chips and related income also had an economic impact on the remaining sawmills in the region. In the early 1900s, the pulp products produced in Alaska were shipped to over 30 countries worldwide. The majority of the saw mills were custom cutting the high-grade hemlock and spruce logs primarily for Japanese customers. The technical and economic aspects of creating an integrated industry based on production of medium density fiber board (MDF) were reviewed in 2004 by Leonard Guss Associates (2005). Their review examined the alternative market replacement for chips and marginal saw log grades. Additional markets for logs and lumber in the lower (48) states, export chips, and export lumber also exist for the SEA timber. Given the rough terrain and old growth timber in SEA cable yarding systems have traditionally been most commonly utilized. In the past logging was conducted on a watershed by watershed basis that resulted in removal of high volumes of timber from relatively concentrated (concentrated in that during any given time period annual operations were centralized). The movement to environmental management harvest blocks now consists of scattered smaller blocks that are dispersed across the landscape. These changes have an impact on economics and the yarding systems that are most suitable for use in a specific location and for the overall range of conditions faced on an annual basis. Existing industry can not justify increased investment in equipment without a steady supply of timber. New industry will not move to SEA and make the necessary investments unless they are confident a perpetual supply of wood can be harvested and delivered to the facilities so they can recoup the investments through operations (i.e. timber must be available to accommodate units of equipment as investment is made). This report analyzes the volume of timber available, the estimated annual harvest over rotation periods of years, the various potential markets available, and the costs associated with harvesting. The U.S. Forest Service (USFS) - Tongass National Forest (TNF) manages approximately 88% of the timber in SEA and therefore is the controlling influence on the amount of annual timber available and perpetually available. An analysis of the TNF 1

5 timber base was made through a Geographic Information System (GIS) application to map the location and volume of timber available utilizing USFS data for the TNF. This analysis developed a selection of gross acreage of ±1,817,000 acres containing suitable timber acreage as well as non-forest and non-productive acres is at a minimum available for timber production. The selected ±1,080,000 net acres of suitable old growth timber with estimated ±29,145,700 thousand board feet (MBF) of volume (±27 MBf/Acre) would provide for an annual harvest of approximately ± 365,000 MBF over an eightyyear rotation period as calculated from USFS data.. A reduced volume per acre in the range of MBF/Acre would lower the rotation period to seventy. An additional ±302,000 net acres of second-growth timber is contained within the gross acreage. The selected area was then analyzed to develop estimates of equipment cost, logging cost, manpower and investment. A consistent volume of timber made available annually will provide for an evenflow transition from old growth to second growth. The ±302,000 acres of second growth contained within the selection area will help augment the volume available for that transition. Second growth obtaining early harvest age will lower the harvest required on old growth throughout the rotation.. This second growth at conservative volumes per acre would add years to the rotation period extending the present harvest volume rotation to years. The increased level of timber harvest required for an integrated industry will require new investments in logging equipment, transportation systems, and supply networks. What is the mix of equipment and manpower necessary to harvest 360 million board feet (MMBF) annually? What is the cost associated with ramping up to the 360 MMBF level of annual harvest? Approximately employees would be required to sustain an annual harvest of ± 360 MMBF at a harvest cost of $380-$400 per MBF. The estimate takes into account the presently installed capacity and the required additional (19) harvesting sides - (5) Helicopter and (14) Ground Based. Investment in equipment to supplement the existing capacity and provide for new conventional ground based operations is estimated at $16.8 to $21.0 million. Additional helicopter operations would be contracted and are included within the estimated harvesting cost. Cascade Appraisal Services, Inc. is a diversified organization combining traditional forestry services with a wide variety of industrial appraisal capabilities. Incorporated in 1977, Cascade Appraisal as a company has provided services to clients over the past 30 years. Clients include numerous major forest products companies, law firms, public agencies, accountants, private landowners, and investors. The company principal, Ray E. Granvall Jr., has 38 years of forest products experience both in timber and timber land projects and industrial forest product plants nationwide and an additional 7 years in logging operations. Cascade Appraisal Services, Inc. has its own computer network, library, mapping, photogrammetric, and drafting facilities. 2

6 INTRODUCTION The past two decades were a difficult and turbulent time for the SEA timber industry. The closing of pulp mills in Sitka and Ketchikan and the constriction of timber sold by the USFS resulted in a fundamental restructuring of the industry that is at best unstable and unpredictable. With the closure of the two pulp mills the industry lost the integration necessary for efficient utilization of the timber resource. These mills efficiently utilized the low grade and utility cull logs which have little or no value to the remaining sawmills. In order to sustain a healthy and efficient forest products industry some form of fiber utilization must be developed for these low-end logs and for the wood chips and mill residues produced by the sawmills. One proposed solution would be to build a MDF plant. Such a mill would use low grade logs, wood chips and even some sawdust as furnish. Sealaska Corporation (Sealaska) is actively researching the possibility of building a biofuels (cellulose to ethanol) plant. The biofuels plant would utilize sawmill by-products such as bark, sawdust and other under-utilized wood resources. Additional consideration is the shipment of chips and round logs to the Northern California, Oregon and Washington ports for utilization in mills in the Pacific Northwest (PNW). Presently, mills in that area are importing logs from Canada and as far away as Chili and New Zealand. Current levels of timber harvest on the TNF are insufficient to support a fully integrated industry. Since 2001 the volume of timber harvested annually has fallen below 50MMBF. AccordingtoUSFSrecordsonly43.2MMBFwasharvestedinfiscalyear Recent studies suggest a harvest level of 360 MMBF is required to maintain a healthy integrated industry. When the industry lost the two pulp mills it lost not only the ability to use low-end fiber sources it also lost a large skilled work force. The subsequent constriction of timber supply by the TNF, lead to additional losses in the work force but just as important was the loss of infrastructure necessary to harvest larger quantities of timber. Purpose The purpose of this study is to analyze the required investment based upon the amount of equipment required to harvest an annual amount of timber over a year rotation period. Select an area in the TNF with volume sufficient to maintain a level of harvest capability required to support an integrated forest products industry in SEA. Methodology - The Information and analysis in this document were derived from published and unpublished reports of the USFS, State of Alaska, and a variety of private data. Secondary data has been supplemented by industry and USFS representatives. The data is first analyzed by a GIS mapping of the TNF suitable timber resource to select an area that would provide an annual harvest of approximately 360 MMBF over the rotation period. Then the equipment and manpower required to harvest this volume is determined taking into consideration both assets in-place in SEA and necessary additional assets. The investment in additional equipment for both existing operations and new operations is then estimated. 3

7 CURRENT SITUATION TIMBER OWNERSHIP - SEA consists of approximately 22.9 million acres. Almost 11 million of these acres are forest land. Of the forestland approximately 4.1 million are classified as unreserved productive timber land. Approximately 4.4 million acres of the forest land in SEA (40%) is reserved in national parks, national forest wilderness areas and game reserves (Campbell et al, 2004). Federal, State and Local governments own and manage 95% of the forest land in SEA. Private ownership accounts for only 5% of the forest land and 10% of the productive timberland (Campbell et al, 2004). See Table 1 below. Ownership ESTIMATED FOREST ANDTIMBER LAND AREA Timber Land Other Forest Land TABLE 1 Total Forest Land Million Acres National Forest Other Federal < State and Local Private Source: Campbell et al, 2004 The total volume of timber (growing stock) in SEA is estimated to be billion cubic feet (595.4 million cubic meters or approximately billion board feet). The TNF manages almost 88% of this volume (Campbell et al 2004). As the data above demonstrate, the TNF has a virtual monopoly on the timber supply in the SEA region. This monopoly is further strengthened because nearly all of the timber produced in the private sector is exported as unprocessed logs. Sawmills and other wood processors in SEA are therefore almost entirely dependent on USFS timber. PUBLIC VS.PRIVATE TIMBER - Over the years, the supply of public timber has been essentially price-inelastic, with the quantity of timber offered for sale at any time showing little response to price. Prior to the early 1990 s, it had been the goal of the USFS to offer a non-declining even-flow of timber with little regard to the current market conditions. Under these conditions, changes in demand were expressed almost entirely in price changes with little change in quantities offered. In contrast to public timber, the supply of private timber has proven to be much more price-elastic. By increasing the price offered, the buyers of private timber typically brought out an increased quantity for current cutting. Because of this and other factors, price movements for private timber tended to be less pronounced than those shown by bid prices for public timber. 4

8 TIMBER HARVESTING - The volume of timber available for harvesting on the TNF is not determined by the interplay of supply and demand in a competitive market. It is determined by federal policy, politics, agency budgets, false assumptions in regards to volumes, and litigation. The result is a notoriously unstable supply. As Figure 1 below demonstrates, the volume of timber harvested has fallen precipitously for the past two decades and has been at or below 50 mmbf for the last six years. FIGURE 1 TIMBER SOLD AND HARVESTED ON THE TONGASS NATIONAL FOREST Source: USFS, Region 10. The 1997 Tongass Land Management Plan reduced the Allowable Sale Quantity (ASQ) from 520 MMBF to 267 MMBF. Since that time the Tongass has offered for sale only a small fraction of that quantity. See Table 2 on page 6. For example in the latest year reported, 2006, only 24 MMBF were offered for sale. This is less than 1/10 of the ASQ. Of the timber actually offered for sale between 1998 and 2006, only 75% was salable. The rest was not economically harvestable. The reason for this is due in part to the way the USFS structured the sales and partly because the remaining sawmills could not efficiently process the low quality timber being offered (McDowell Group, 2004). Table 2 shows the annual volume of timber offered for sale by the TNF since 1998, the volume actually sold and the volume harvested. The timber volume is counted as offered the first time the sale is advertised for sale. The volume is considered sold when the sale is officially awarded. It may take several months after the sale is advertised until 5

9 the bids are received and awarded. In addition, a given timber sale may not sell as originally offered. Such a sale may be restructured and offered again at a later time. TABLE 2 TONGASS NATIONAL FOREST TIMBER OFFERED,SOLD AND HARVESTED Fiscal Year Offered Sold Harvested MMBF Total Source: Lerum 2006 The Alaska timber industry has for years complained that the timber offered for sale by the TNF was economically marginal. As the data above demonstrate, at least 25% of the timber offered was economically inoperable. Much of the volume actually sold was economically marginal due to excessive harvesting costs. These expensive logging costs are verified by USFS studies which collect actual logging cost data in Alaska. Inga Petäistö, timber valuation specialist for the Alaska Region, stated that cost collection studies have found unbelievably high logging costs and unbelievably low production. Petäistö found that these data were not anomalous and subsequent study revealed a continuing trend (Petäistö, 2006). Follow-up field research was undertaken to determine why the logging costs were so high. Petäistö summarized her results as follows: Lack of guyline anchors Difficult rigging for illogically shaped units Severe sidehill yarding Tailtree tieback problems Low volumes per acre Many different cutting prescriptions within unit Difficult rigging for leave patches Frequent landing/road changes in small units. 6

10 Most of these problems are due to poor harvest unit design and can be eliminated or minimized with careful planning. The unstable supply of economically harvestable timber poses serious problems for any investment in the forest products industry. Any hope for establishing a stable, sustainable integrated timber industry will require a commitment from the federal government assuring stable and affordable supplies of timber. CURRENT HARVESTING CAPACITY - We are aware of no recent surveys estimating the harvest capacity of the logging industry in SEA. A few simple assumptions may be warranted. Recent history shows industry has the capability of harvesting approximately 50 MMBF from the TNF and MMBF from Alaska State lands. One can safely assume a minimum existing capacity of MMBF. Unutilized capacity exists, but without a thorough survey the amount is unknown. Table 3, below, provides an estimate of the logging and road construction sides still in place in SEA. Both Columbia and Croman Helicopter companies are capable of providing additional helicopter sides if volume were available. CURRENT HARVESTING CAPACITY TABLE 3 ROAD LOGGING CONST. OPERATOR SIDES MILES REMARKS Phoenix Log Log for Sealaska only Durette Construction Road Contractor Columbia Helicopters 2 Helicopter contractor (Sealaska) Alaska Logging Corp Log for themselves no contract Icy Straits 1 Log for themselves no contract Pacific log and Lumber 3 Log for themselves no contract Viking Lumber 2 Log for themselves no contract Rock and Road Const Road Contractor Southeast Road Builders 20+ Road Contractor Reid Bros. 10 Road Contractor Silver Bay Logging 3 10 Log for themselves no contract Croman 1 Helicopter contractor 3-D 2 5 Going out of business Misc. 3 Prince of Wales 1 side operations Ed Brauer 2 Contract logging Channel Const Contract logging and road Shaan Seet 2 Contract logging Wasser & Winters 3 Contract logging (Last Season) 33 Sides Sealaska recently has been harvesting approximately 100 MMBF per year. This volume will probably decline to 50 MMBF in the near future (McDowell Group, 2006). Of the current logging operations set forth in Table 3, approximately (19) of the sides 7

11 (highlighted) are either engaged full time on private lands or going out of business. If the TNF were to quickly ramp up its timber sales program some of this excess capacity could be easily redirected toward public timber harvest. INDUSTRY MILL CAPACITY - The most recent survey of sawmill capacity in SEA estimated a total installed capacity based upon net saw log volume (Scribner log scale) that could be utilized of 359,850 MBF in 2005 (Parrent, 2006). This is down 28% from the estimated capacity of 501,850 MBF in Despite the continuing attrition, installed capacity still greatly exceeds the current timber supply. As a result, the utilization capacity of the region has fallen to or below 10% for the past several years. See Figure 2 below. The low utilization rate obviously cannot be maintained in the long run. Without a substantial increase in supply one would expect to see a continuing loss of capacity. But at least in the short term the existing sawmills can easily absorb an increase in timber supply associated with an integrated industry. 80% FIGURE 2 SOUTHEAST ALASKA SAWMILL UTILIZED CAPACITY, % 60% 50% 40% 30% 20% 10% 0% Fiscal Year Source: Morse, 2000, Kilborn et al, 2004, Brackley et al, 2006, Parrent, 2006 TIMBER MARKETS Markets for SEA timber include the manufacture of lumber for both domestic (including both intrastate and interstate commerce) and export overseas, interstate log commerce, chip exports both interstate domestically and foreign, 8

12 and residual byproduct manufacturing raw materials. All of these markets existed from the 1950 s through the 1980 s when an integrated industry was present. The markets available at that point in time are still available today provided a sustainable timber resource is also available. Without a long term non-declining even flow from the public sector harvested at economical rates, the participants in these markets on the demand side are not interested in the products available from Alaskan forests. Japan imported lumber has been greatly increased from 1961 levels of approximately 547,000 cubic meters. Their import increased at a rate of ±8.4% per year until When the economy of Japan sharply declined in 1997, their lumber imports dropped and have maintained an approximate 8,500,000 cubic meter lumber import volume to the present (See Figure 3). FIGURE 3 The drop in lumber imports by Japan was compounded by a reduction in volume from North America as a whole but more significantly from the United States (U.S.). Figure 4, page 10, illustrates the change in source for Japan decreasing in Canada and the U.S. while increasing in Europe and Russia. Although Canada is still the number one supplier, the U.S. has dropped from second to sixth and is trending downward. One possible cause may be the compliance of European countries in meeting the specifications for the Japanese market. Some U. S. companies in the past have cut to 9

13 Japanese standards with moderate success. Others have simply cut to U. S. standards with the expectation that their production would be accepted in the export market to Japan. The majority of lumber produced in SEA today is shipped south to Canada and the PNW markets. The quality of hemlock and spruce lumber produced in SEA is superior to those species presently being found in the PNW. Most of the PNW hemlock is being harvested from coastal stands. Both the hemlock and spruce from SEA possess a higher ring count per inch than that of the PNW species. SEA hemlock is more related to Cascade hemlock in regards to quality but still is superior. FIGURE 4 10

14 The small amount of lumber currently being exported from SEA comes from public lands and is comprised almost entirely of Sitka spruce. The volume of lumber exported nearly matches that which is produced based upon CY 2005 data (Parrent, 2006). Figure 5, below, shows the change in volume from 1989 through 2004 and includes the relative price levels for those years. Nearly the entire volume in went to Japan. The price level in 2004 in excess of $1080 far surpasses the prices received during the years when significant volumes were being exported. The demand for additional volume of spruce lumber is evident. FIGURE 5 250,000 Alaska All Softwood Lumber Export Volume and Value By Destination, 1989 through 2004 Japan All Others Ave. Value Per MBF $1, ,000 $1,000 $ ,000 $ ,000 $400 50,000 $200 0 $ Year Source: Production, Prices, Employment and Trade in Northwest Forest Industries. Various issues Cascade Appraisal Services, Inc. 11

15 Another market for SEA timber production is the movement of logs to the lower (48) states primarily in the PNW. The lack of raw materials in the PNW is exemplified by the #2 Douglas-fir (2M) saw log prices when compared to the Framing Lumber Composite Index published by Random Lengths (See Figure 6 See Below). When the price for lumber moves upward the log price is directly correlated and inversely when the lumber price falls the log price is indirectly correlated. Douglas-fir 2M saw log prices are a common indicator of the price movement for that species which in turn is correlated to other species. The 2M grade represents about 60% of the volume in mixed old-growth and young growth stands, 33% in young growth stands, and approximately 50% overall of stands in the PNW. The #3 Douglas-fir (3M) saw log grade along with hemlock grades is well correlated to the 2M grade. As younger stands are being harvested in the PNW and Northern California, the logs are sold on a camp-run basis. The exemption of all logs <15 in diameter and grades 3M and 4M of any diameter, up to 50% of each sale overall volume, for shipment to the lower (48) states would help balance the supply (Castillo, 2007 and Bschor, 2007). Although a purchaser may ship any grade of log included within the 15 dia. x 40 long log scaling length, it would be most prudent to select logs with a higher grade to offset shipping costs. These logs would be directly competitive with the 2M saw logs being utilized in the PNW area and would receive a higher price in appraisal calculations for SEA timber. FIGURE Lumber Price Index Compared to Puget Sound Delivered Log Values January 1989 February Framing Lumber Composite Index Douglas Fir #2 Saw Log Value Source: Random Lengths, Log Lines 2007 Cascade Appraisal Services, Inc. 12

16 A third market may exist in the form of residual chips being exported off-shore or to the lower (48) states. The required volume of chips and recycled containerboard within the Pacific Rim market is driven by the large number of pulp and paper mills constructed in recent years. Chips from SEA would have an advantage in freight to these countries when compared to operations in the lower states. The market for imported chips by Asian countries is show in Figure 7, below, for Japan and Figure 8, page 14, for China, Korea and Taiwan. Interest by Asian manufacturers in pulp and paper is further exemplified by participation in facilities in the lower (48) states. Lee & Man Paper Mfg. Ltd. of Hong Kong purchased the Samoa, California bleached kraft pulp mill facility and turned it into an unbleached kraft pulp mill (UKP) under the name Evergreen Pulp, Inc. (EPI). The Samoa facility is the largest UKP mill is North America. With a total capacity of 220,000 standard tons (200,000 metric tons), EPI accounts for 10% of the entire global market for UKP production (Evergreen Pulp, Inc. Corporate Profile, 2007). Recently, EPI made an offer on the Weyerhaeuser bleached sulfite mill located at Cosmopolis, Washington. Lee and Man sources much of its fiber needs in wood pulp from North America. FIGURE 7 20,000,000 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 Date Source: FAO Statistics Division, FAOStat, March Cascade Appraisal Services, Inc. 13

17 FIGURE 8 One of the chip export facilities near Coos Bay, Oregon (Oregon Chip Terminal, Inc.) is also operated by Daio Paper Corporation of Japan. America Chung Nam (ACN) out of City of Industry, California is the largest exporter of recycled old corrugated containers (OCC) in North America. ACN is only (10) years old and supplies OCC to their Nine Dragons Paper (Holdings) Ltd. (NDP). NDP has virtually new pulp and paper mills, started in 1996, at their Guangdong (cap. 1,900,000 st/y) and Taicang (1,000,000 st/y) mills in China (Paperloop, 2005). 14

18 The U. S. participation in the International chip markets has dramatically fallen as seen in Figure 9, below, illustrates the drop in chip exports from the U. S. as compared to other chip exporting countries in the International market place. Once the leader in chip exports at nearly 10,000,000 cubic meters, since 1999 the U.S. has dropped to an essential tie with Chile at under 4,000,000 cubic meters. The actual drop was from 9,848 thousand cubic meters in 1999 to 3,880 thousand cubic meters in 2005, a reduction of ± 60%. Chips from SEA are currently shipped to Canada and Oregon. The drop in U. S. chip exports can not be attributable to a reduction in Pacific Rim demand as shown by the increase in imports to these countries. FIGURE 9 15

19 INTEGRATED FUTURE MARKETS With the closure of the two pulp mills in SEA the industry lost the ability to efficiently utilize the low end log grades which make up a large portion of the TNF timber base. It is critical for the health of the industry to redevelop this capacity. As an interim step, Dennis Bschor, USFS Alaska Regional Forester, has authorized the export of certain Sitka spruce and hemlock logs to the lower 48 States. Should this market prove to be viable it could provide some short term relief until permanent in-state processing could be developed. It would also allow the TNF to start ramping up the harvest levels to meet existing capacity and demand. Leonard Guss and Associates, Inc. recently studied the technical & economic feasibility of constructing a MDF plant in SEA (Leanard Guss and Associates, 2005). They determined that such a plant may be feasible by exploiting niche markets for thin board MDF in Japan. Sealaska has been actively researching a biofuels plant. With increased Federal support for biofuels development this alternative may be even more attractive now. Just this month Chevron Corporation and Weyerhaeuser Company announced a letter of intent to jointly assess the feasibility of commercializing the production of biofuels from cellulose-based sources, especially wood fiber. As discussed in the market demand section above, China and other Asian nations have a nearly insatiable demand for wood fiber in the form of chips or pulp. Although it appears unlikely that a pulp mill will be built any time soon, large scale wood chip production would utilize low end material and provide much needed market diversity. Should the veneer mill in Ketchikan be restarted this would also help to fully integrate the industry. Many sawmills in the lower 48 States have added wood pellet manufacturing to their mills. This may be a viable option in Alaska also. Unfortunately no large investments in SEA forest products will be made without the assurance of a consistent long term supply of economic timber. The US and Asian markets demand stable and consistent product supply. The SEA timber supply is a virtual monopoly controlled by the Federal Government and it is not responsive to normal competitive markets. What is required is not an economic decision but a political decision. The US Government must make a policy commitment to support SEA industry. REQUIRED HARVEST CAPACITY Anestimated360to375MMBFperyearwould be required to sustain an integrated industry based upon current milling capacity and the introduction of one or more residual manufacturing facilities. Combine this with the potential for domestic interstate commerce for up to 50% of logs < 15 in diameter, participation in Pacific Rim markets such as the export of lumber to Japan and other Asian countries along with chips and this volume estimate is minimal. EQUIPMENT - Investment needed in new equipment or used equipment depends upon the logging method and type of equipment. Two pieces of equipment currently being used in production with greatly diverse ages are shown in Photos 1 and 2, pages 18 and 19 respectively. The tower yarder is ±34 years old and the shovel is only ±3 years old at the present. Regardless of the age, both machines perform as they were designed. 16

20 The photos demonstrate the service life of modern logging equipment. Although Skagit and other manufacturers are no longer in business, their machines are still operable if given proper maintenance and repair. Used equipment of all types necessary to supplement the logging operations already in place in SEA is readily available. This would include cable based swing and tower yarders, ground based shovels, log trucks and all of the support equipment for the harvesting sides. A quick search on the internet revealed (97) yarders, mostly in Oregon and Washington, offered by a single internet site for $475,000 or less based upon PHOTO SKAGIT - BU 80 Yarder and Tower (USED ±$25,000) make, year and model (GSNET.com, 2007). Madill Equipment Canada and Madill Corporation Kalama, Washington (Madill) just sold a 2001 Madill 120 Swing Yarder with 5,500 hours for $550,000 U.S. Also, a 1996 Madill 172 Tower Yarder with 17,000 hours sold for $450,000 U.S. in Oregon (Larter, 2007). Compared to the new prices listed below, quality used equipment maintains its value. The USED Madill 120 at $550,000 sold for ±60% of new value and the 1996 Madill 172 for ±48% of new value. 17

21 PHOTO LINK BELT 370 LXTL Shovel/Loader (USED ±$280,000) New equipment is considerably more expensive but can often provide benefits in greater production, ease of operation and reduced maintenance cost. As an example, a Madill 172B Tower Yarder track mounted would cost approximately $945,000 new. Other Madill machines such as a Madill 120 Swing Yarder ($915,000), 225B Swing Yarder ($995,000 U.S.) or a Madill 124 Swing Yarder ($1,050,000 U.S.) are available on a time frame of (30) weeks delivery, including the 172B, from date of order. New yarders are on a build to order basis and are not stocked. (Larter, 2007). Each operator would weigh the benefits of new versus used equipment in their deliberations based upon the quantity of timber available for harvest. A minimal volume would most likely direct the user to the used market. While a significant guaranteed volume could provide the basis for investment in new equipment or a mixture of new/used allowing for a reasonable time period for recapture through amortization. Equipment amortization along with labor costs is one of the key components of the cost to log. Without a sufficient time to recover equipment costs, the contract operator would necessarily have to charge a greater amount for contract logging. A timber owner with company logging sides would receive less return and subsequently bid a lesser amount for the timber or not bid at all. This is the process of simple economics. 18

22 ECONOMICS -ESTIMATEDLOGGING COSTS AND INVESTMENT LOGGING COST ESTIMATE Logging cost estimates were made using a selection of 1,817,369 total acres containing 1,081,734 acres if old growth (59.52% of total) and 19

23 301,940 acres of second growth (16.61% of total). Timber comprises a combined total of 1,383,674 or 76.13% of the total acreage with the balance in non-forest, non-productive and unknown acres (See Table 4, page 19). The selected acres are depicted on Map 1 at the end of this report. The various operating locations are labeled on the map and combined into (3) larger areas North, Central and South. The acreage with accompanying volume estimates were made to provide a basis for annual cut over a rotation period from 70 to 90 years as calculated based upon USFS data. These forest lands were specifically selected to concentrate timber production into economically efficient units within the TNF. This differs from current TNF land management practice which favors small highly fragmented timber production areas. Seventeen blocks of forest land were selected. The TNF Veg_Mod GIS Database was used to define the timber stands and the volume strata were obtained from the 2007 TNF Draft Environmental Impact Statement (DEIS). Estimated logging costs were calculated for the selected forest lands and are shown in Table 5, below. These costs are based on both private industry and USFS experience. Estimated Logging Costs Table 5 Cost Item Amount Cost Source Mobilization $2 Industry Fall & Buck $35 Industry Yard & Load - USFS Basis $175 Percentages from Draft EIS 2007 Shovel 27% $81 Short Span Cable 42% $159 R10 Cost Calculator Long Span Cable 5% $168 Helicopter 26% $300 Industry Yard & Load - Industry Basis $150 Industry Haul $20 Draft EIS 2007 Road Construction $37 Draft EIS 2007 and Average Unit Variables Road Reconstruction $4 Draft EIS 2007 and Average Unit Variables Road Use Fees & Maint. $1 Draft EIS 2007 and Average Unit Variables Sort Yard $35 Industry Towing $67 Estimated with GIS and R10 Cost Calculator Scaling $8 Industry Administration $20 Industry Total Delivered Log Cost -USFS Estimate $404 Total Delivered Log Cost -Industry Estimate $379 Total estimated logging costs are in the range of $380 to $405 using a combination of industry and USFS cost factors. INVESTMENT - In order to calculate the number of logging sides required to harvest an annual cut of 360 MMBF several assumptions were required. Logging productivity is highly dependent on the volume per acre harvested. The average volume per acre 20

24 calculated for the selected stands based on USFS GIS and volume strata is approximately 27 MBF per acre. Industry experience suggests that this is a high estimate. For our estimates we used a more conservative MBF per acre that reduces the rotation to approximately 70 years. Based on Table of the 2007 TNF DEIS, we assume that 26.95% of the volume is harvested by ground based systems, 46.75% is harvested by cable logging systems and 26.30% is logged by helicopter. Our experience and knowledge of large private industry logging operations in SEA suggest that these percentages are reasonable estimates. Daily production rates are assumed to be ±2.5 acres for ground based systems, ±1.5 acres for cable based systems and ±5 acres for helicopter units. Lastly it is assumed that conventional logging systems (ground and cable) will average 250 production days per year and helicopter units will average 150 days. Based on these assumptions, the number of logging sides required to harvest 360 MMBF per year can be estimated. Table 6, page 22, shows the details of these estimates. It is estimated that 7 ground based sides, 20 cable sides and 6 helicopters sides would be required for a total of 33 sides with an estimated 560 to 600 employees to sustain an annual harvest of ±360.0 MMBF. The number of estimated sides is rounded up to account for dispersion of acreage throughout several locations. The selection of timber is broken into (3) separate areas combing the volumes in close proximity to estimate the number of sides required to operate in each broad area over the rotation period. The estimated Sides Required by System for each of the operating locations shown on Table 6 are an average of the entire estimated volume for the respective location and the system capability on a daily basis. It is understood that all systems and operating locations will not be operated on simultaneously but rather rotated between locations. Current logging capacity available for harvesting public timber is estimated to be 13 conventional logging sides and one helicopter side, see page 5. An additional 14 conventional sides and 5 helicopter sides would be necessary to harvest the increased annual volume. Helicopter logging companies such as Columbia Helicopter (Aurora, Oregon), Croman Corp (White City, Oregon) and Erickson Air-Crane (Central Point, Oregon) could be contracted to provide the additional helicopter capability. As discussed earlier there is a large market of used logging equipment available in the Pacific Northwest. An estimated $1.2 - $1.5 million dollar investment per additional conventional logging side is reasonable given the current market prices for used equipment. The total investment required for 14 additional conventional logging sides in SEA would be an estimated $16.8 million to $21.0 million. This investment would include yarding equipment, loaders, log trucks, support, and maintenance equipment. This cost estimate does not include additional barging and towing equipment. MAJOR LOGGING EQUIPMENT COMPONENTS: (Yard, Load & Haul) Cable Yarders (10) ($±450,000 USED towers and swing yarders) Log Loaders (18) ($100,000 to 280,000 USED, for shovel yarding and loading) Logging Trucks (95) ($22,500 to $40,000 USED depending upon mileage) 21

25 22

26 The estimated investment in equipment takes into consideration the more efficient and higher valued major components because of the difficulty in logistics such as obtaining parts for extraordinary maintenance. New equipment is not considered to be a viable alternative at this point in time. The quantity of high quality used equipment that is presently available and the current lack of a guaranteed annual volume would preclude new logging companies or the expansion of existing companies from investing in all new cable machines up front. News markets, especially Pacific Rim markets, can not be entered without a continuous supply of raw material required to make the products they demand. Existing saw mills can not survive on a volume substantially below their current ±360 MMBF annual log capacity. New industry such as thin board MDF can not be attracted to SEA without a steady raw material source. The additional harvesting equipment and manpower as discussed above can not be committed without the timber volume to harvest. 23

27 BIBLIOGRAPHY Alexander, Susan J Timber Supply and Demand: 2001 to 2005: Alaska National Interest Lands Conservation Act Section 706(a) Report to Congress, DRAFT. Report XX. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 16 p. Brackley, Allen M.; Parrent, Daniel J.; Rojas, Thomas D Estimating Sawmill Processing Capacity for Tongass Timber: 2003 and 2004 Update. Res. Note PNW- RN-553. Portland, OR: U.S. Department of Agriculture, Forest Service, Pacific Northwest Research Station. 15 p. Brackley, Allen M.; Rojas, Thomas D.; Haynes, Richard W Timber Products Output and Timber Harvest in Alaska: Projections for Gen. Tech Rep. PNW-GTR-677. Portland, OR: U.S. Department of Agriculture, Forest Service, Pacific Northwest Research Station. 33p. Bschor, Dennis E Limited Interstate Shipments of Unprocessed Sitka Spruce and Western Hemlock. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 1 p. Campbell, Sally; van Hees, Willem W.S.; Mead, Bert Southeast Alaska Forest: Inventory Highlights. Gen. Tech. Report PNW-GTR-609. Portland, OR. U.S. Department of Agriculture, Forest Service, Pacific Northwest Research Station. 20 p. Castillo, Daniel O Timber Sale Appraisals and Limited Interstate Shipments of Unprocessed Sitka Spruce and Western Hemlock Timber.. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 10 p. Crone, Lisa K Southeast Alaska Economics: A Resource-Abundant Region Competing in a Global Marketplace. Landscape and Urban Planning 72 (2005): Evans, Robert J.; McCormick, Doris M River Valley Biomass Refinery Market Study: Final Report. Lakewood, CO: MicroChem Technologies, Inc. 139 p. Evergreen Pulp, Inc. Corporate Profile, Website accessed 4/15/2007. Kilborn, K.A.; Parrent, D.J.; Housley, R.D Estimating Sawmill Processing Capacity for Tongass Timber. Res. Note PNW-RN-545. Portland, OR: U.S. Department of Agriculture, Forest Service, Pacific Northwest Research Station. 12 p GSNET.com Website accessed 2/12/2007. Larter, Bob Personal Communication. V.P. Sales and Marketing Madill Corporation. Lerum, Jan Timber Volume: History & Projections. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. Web page, last accessed March 8, Leonard Guss Associates, Inc Technical and Economic Feasibility of Constructing a Medium Density Fiberboard Plant in Southeast Alaska. On file with: 24

28 University of Alaska Fairbanks, Sitka Forest Products Program, P.O. Box 6410, Sitka, AK p. Mason, Charles; Margolis, Michael; Tsournos, Pete SEAlaska Timber:Why Do Some Offerings Go Unsold? Northwest Journal of Business and Economics, 2004: McDowell Group Timber Markets Update and Analysis of an Integrated Southeast Alaska Forest Products Industry. Juneau, AK. 63 p. (Prepared for the Southeast Conference) McDowell Group, Update and Clarification of the 2004 Timber Markets report. Juneau, AK 3 p. Morse, Kathleen S Responding to the Market Demand for Tongass Timber: Using Adaptive Management to Implement Sec. 101 of the1990 Tongass Timber Reform Act. R10-MB-413. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 43 p. Paperloop, Lockwood-Post Directory of Pulp & Paper Mills, 2005 Edition. San Francisco, California p. Parrent, Daniel J Mill Capacity and Utilization Study, CY 2005 (Evaluating Demand for Tongass Timber). Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 7 p. Petäistö, Inga Production (Studies and Impacts). 4/4/06 Presentation. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 36 p. Petäistö, Inga Alaska Cable Logging Costs. 4/11/06 Presentation. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 38 p. U.S. Department of Agriculture, Forest Service Draft Environmental Impact Statement, Tongass Land and Resource Management Plan Amendment, Summary. R10-MB-602a. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 28 p. U.S. Department of Agriculture, Forest Service Determining the Range of Expected Timber Purchases Fiscal Year Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. U.S. Department of Agriculture, Forest Service Status of the Tongass National Forest (ANILCA706(b) Report): 1997 Report. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 7 p. U.S. Department of Agriculture, Forest Service. Various Years. TimberCutand Sold on National Forests. Juneau, AK: U.S. Department of Agriculture, Forest Service, Alaska Region. 25