Washington s Forest Products Industry: Current Conditions and Forecast 2002

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1 MISC0484E Washington s Forest Products Industry: Current Conditions and Forecast 2002 Produced by The Inland Northwest Forest Products Research Consortium, a research cooperative centered at the Forest Products Department at the University of Idaho, the Bureau of Business and Economic Research at the University of Montana-Missoula, and the Wood Materials and Engineering Laboratory at Washington State University January 2002 The authors of this report are Keith A. Blatner, Professor and Chair, Department of Natural Resource Sciences, Washington State University, Pullman. (509) , blatner@cahe.wsu.edu William E. Schlosser, Research Associate, Department of Natural Resource Sciences, Washington State University, Pullman. (509) , schlosser@wsu.edu Charles E. Keegan III, Director of Forest Industry Research and Research Professor, Bureau of Business and Economic Research,the University of Montana, Missoula (406) , keegan@selway.umt.edu Steven R. Shook, Assistant Professor of Forest Products, College of Natural Resources, the University of Idaho, Moscow. (208) , shook@uidaho.edu Francis G. Wagner, Professor of Forest Products, College of Natural Resources, the University of Idaho, Moscow. (208) , fwagner@uidaho.edu

2 Washington s Forest Products Industry: Current Conditions and Forecast, 2002 Overview Forests cover more than half of Washington s land area. Of the 23 million acres of forest land in the Evergreen State, 16.2 million acres are classified as commercial forests. All of Washington s forest lands contribute to the state. Whether the forest is managed primarily to provide wood products, recreational opportunities, or wildlife habitat depends essentially on who owns it. Washington s $176 billion gross state product (1997) included $2.2 billion from lumber and wood products (1.2% of the total). Paper and allied products contributed another $1.3 billion in the same year. Lumber production was steady during 2000 and early 2001 (Figure 1). The output of structural panels declined slightly in 2000, but remained near recent production levels. Pulp and paper markets also declined modestly during 2001, with the downturn in the global economy. Figure 1. Lumber and softwood structural panel board production. 2 Nearly two-thirds (64%) of all forest lands in Washington are owned or managed by federal, state, local, and tribal governments. The U.S. Forest Service is the largest land manager in Washington State, overseeing 9.2 million acres of national forest land. Given the changing management emphasis on federal lands and the highly conflictual nature of National Forest timber sales in recent years, commercial timber harvests on the national forests in Washington have dropped to a small fraction of historic levels (Figure 2). This was particularly true in western Washington, where the volume of timber sold on federal lands dropped to approximately 2.5 million board feet during Conversely, sold volumes on federal lands in eastern Washington increased by 30.4% above 1999 levels to 80.7 million board feet but remain significantly below historic levels. It is clear that the harvesting of timber on federal lands west of the

3 Figure 2. National Forest timber cut and sold volumes in Washington State. Cascade Mountains has been essentially shut down, while the modest harvest levels found on the eastside of the state probably reflect the increased attention given treatments to reduce fire risk or result from fire salvage. The Washington State Department of Natural Resources is the second largest government manager of forest lands in the state, overseeing 2.1 million acres of forested trust lands throughout Washington. Harvest levels on state trust lands have declined somewhat in recent years due to increased environmental regulations, but remain an important source of logs for the state s mills. Harvest volumes for 2002 are projected at slightly more than 500 million board feet, with volumes projected to decline to 470 million board feet by 2003 (Figure 3). Tribal lands also are an important source of timber harvests in the state. The management of Native American forest lands typically attempts to strike a balance between culturally important tribal specific values and the sale of timber for revenue generation (Figure 3). The sale of timber from tribal lands has become an increasingly important raw material source in eastern Washington in recent years. The remaining 36% of Washington s forests are privately owned. Slightly more than half of these lands are managed by the forest products industry. Industrial forest lands are managed primarily for timber production. Nonindustrial landowners and other private business entities own the remainder of Washington s forests. As harvesting on federal lands has declined in recent years (Figure 3), Washington s privately owned lands have become an increasingly important source of timber. Although management objectives vary greatly, harvest levels on these lands are strongly influenced by market conditions.

4 Figure 3. Washington timber harvest by ownership National Factors The first eight months of 2001 were dominated by a weakening economy and a long series of interest rate cuts originating from the Federal Reserve as it tried to keep the U.S. economy from sliding into recession. Congress and the President also worked to stimulate the country s slumping economy through the passage of one of the larger tax cuts in U.S. history. All of these efforts were premised on the notion that the economy would begin to recover during the latter part of 2001, if not sooner. As everyone is aware, the terrorist attacks of September 11, 2001, had a substantial negative effect on the U.S. economy. Real gross domestic product nationally the output of goods and services produced by labor and property located in the United States remained positive during the first two quarters of 2001, but the rate of growth in the economy continued to slow. During the third quarter of 2001, the economy moved into negative territory, shrinking at a rate of 1.3%. Conversely, inflation remained minimal throughout the period. The last quarter of 2001 surprised many analysts, as the sales of new and existing homes unexpectedly rose in November, suggesting a housing sector that continues to defy the overall weakness of the economy. Mortgage rates have been low and had dipped below 7% for several weeks of the third quarter, helping to boost home sales. Consumer confidence rose in December following three continuous months of decline. Continuing efforts by the Federal Reserve to reduce the cost of capital after the September 11th terrorist attack, more recent efforts by the President to urge Congress to pass an additional stimulus package, and the improving nature of the major economic indicators suggest the economy will begin to expand during the second half of Similarly, energy prices, which were a significant issue during the winter of , have declined sharply and should further aid economic recovery. 4

5 Outlook Washington State s economy followed the national trend by declining throughout the year. Unemployment in the state rose, particularly after September 11th. The lumber and wood products sector provided an estimated 30,600 jobs, while the pulp and paper sectors employed an estimated 14,400 citizens of the state of Washington during 2001 (Figure 4). Employment in the lumber and wood products sector lost approximately 2,300 workers from the third quarter of 2000 through the third quarter of An estimated 300 additional jobs are projected to be lost in the lumber and wood products sector during the fourth quarter of Further, employment declines in this sector are also projected for early On a more positive note, the Washington State Office of the Forecast Council (November 2001) projects a rebound of 1,400 jobs during late 2002 and early 2003 in this sector. Similarly, the paper and allied products sector lost 600 jobs over the past year. Employment in this sector is projected to remain essentially level throughout 2002 and 2003 (Figure 4). Figure 4. Employment in Washington from listed segments of the forest products industry, by quarter. The export of goods from Washington State continues to play an important role in the economy in general, and for the forest products sector, specifically. The financial problems in Asia continue to present a problem for forest products exporters. The recent announcement of the Japanese economy sliding into recession indicates these problems are likely to continue well into 2002.

6 U.S. housing starts are estimated at 1.65 million for 2001 one of the few bright spots for the wood products sector in This estimate is up from earlier estimates of 1.56 million for the year. New-home sales rose 6.4% in November 2001, to an annual rate of 880,000, the largest gain of the year. The historically low mortgage rates available by the end of the year suggest a continuation of current housing start levels. Nationally, lumber prices were quite volatile during 2001 (Figure 5), but overall were down for the year. Stumpage prices declined during 2001, with some exceptions for selected species and log grades. The recent imposition of a 12.58% (average) anti-dumping duty, followed by the termination of the 19.3% tariff placed on Canadian softwood lumber imports in August resulted in further confusion over the effect of Canadian softwood imports on U.S wood products markets during Discussions concerning this issue will obviously continue well into 2002, contributing to an increased level of uncertainty in U.S markets. Figure 5. Framing lumber composite price as compiled by Random Lengths While employment in the structural plywood industry in Washington State has remained relatively steady in recent years, the market for structural plywood continues to be adversely affected by the ongoing shift in the construction market from plywood panels to Oriented Strand Board (OSB). Over time, this has resulted in a loss of jobs in the solid wood products industry nationwide as plywood mills have closed or reduced production. In Washington, potential future job losses in this industry will come as a net loss in employment to the state, due to the lack of OSB production capacity. This trend will have a downward effect on prices for the high quality logs utilized by this segment of the industry. This trend appears likely to continue over the next 5 years. Pulp and paper markets weakened during 2001, along with the slowing U.S. and global economy. As a result, mills began curtailing production, thereby reducing demand for chips and pulpwood. Chip prices have declined sharply a trend that is projected to continue through This trend appears compounded by structural changes occurring in the Japanese market as Japanese producers diversify their supply sources away from U.S. chip producers.

7 Industry Leader s Outlook A survey of Washington s lumber mills during late November and December 2001 was conducted to determine industry leader opinions about markets and economic conditions for 2001 and to provide independent predictions for Thirty-eight mills received surveys. Seventeen (46%) had returned completed responses by the time of this report. Mill representatives were asked a series of questions in reference to 2001 conditions, predictions for 2002, electricity issues, and various employee related issues. Almost half (47%) of Washington s mill representatives rate the overall outlook for 2002 as being on par with 2001, with 35% of respondents projecting a better 2002, and only 18% predicting a worse Only 18% of the mills surveyed in Washington State expected gross sales to increase in 2002 over The remainder of the respondents were evenly split on whether sales in 2002 would be about the same as in 2001 (41%) or worse than in 2001 (41%). These same mills estimated production for 2002 will increase (24%), stay the same (41%), or decrease (35%) as compared with The majority of these producers (53%) predicted profits in 2002 will drop when compared with 2001 figures. The remainder of the mill representatives split evenly on predictions that 2002 profits would be on par with those in 2001 (24%) or better than those in 2001 (24%). The majority of sawmills (59%) in the Evergreen State indicated they had made major capital expenditures in facilities or equipment during However, only 19% of these same mills indicated they had introduced any new major product lines during Further, only 11% of the mills indicated they had BOTH invested in major capital expenditures AND introduced new product lines during 2001, indicating that innovation in product development that requires capital expenditure was limited in the state during The majority of responding sawmills in Washington, 71%, indicated mill employment levels (number of workers) remained generally constant from 2000 to Only 12% of the mills indicated increased mill employment in 2001 over 2000, while the remaining 18% of mills reported an employment decrease. The vast majority of sawmills, 94%, said they did not experience a shortage of employees during Yet 71% of the sawmills described newly hired employees as being not very well prepared for their duties. Only 30% reported new hires as being somewhat well prepared. None of the respondents indicated their new hires were very well prepared for their duties in Washington State s sawmills. Approximately threequarters of the sawmills in the state predict even employment numbers from 2001 to Only 8% of the sawmills foresee increasing their labor force, while 18% of the employers predict layoffs in Only 12% of the responding sawmills indicated their plant had permanently eliminated production capacity during Yet approximately two-thirds of the facilities responding to the survey indicated their mill had been forced to curtail production for some amount of time during Prognostications for the economic environment of 2002 were highly variable among the sawmills responding to the survey. Most of the sawmills (53%) in the Evergreen State anticipate prices for their products to remain the same as in 2001, with 29% predicting higher prices, and 18% expecting lower product prices. However, most of the mills, 53%, foresee increased gross sales in 2002 over 2001, with 35% expecting level gross sales volumes, and only 12% looking ahead to decreased gross sales in Even with these mixed expectations, 41% of the respondents see hope of increased profits in One-third of the sawmills predict level profits, with one-quarter of the sawmills bracing for decreased profits in Sawmill production estimates for 2002 are split evenly between coming in at par with 2001 (41%), or rising higher than 2001 (41%). Only 6% of the respondents anticipate a decline in facility production. By far, most of the sawmills in the state are relying on existing capital investments for production capacity in Seventy-one percent of the sawmills do not plan major capital expenditures in their facilities during Three-quarters of the respondents expect the cost of major inputs in 2002 to remain on par with those in The remainder of the sawmill representatives split evenly on whether input prices would increase or decrease in the new year. Electricity availability and cost in 2001 became a national issue; however, Washington s sawmills indicated

8 little in the way of adjustments to the operation of their businesses. Only one mill responding to the survey indicated it was forced to curtail production due to electricity price volatility. None of the respondents indicated they renegotiated electricity supply contracts because of the volatility. However, 29% of the mills pointed out they modified their production processes in response to the shortage of electricity, while 12% of the mills began generating their own electricity. Conclusions The U.S. economy appears poised to resume its growth cycle during the second half of 2002 with the obvious positive implications for the forest products industry, given the continuing efforts of the Federal Reserve, the President, and Congress to jump start the economy. The relative success of U.S. efforts in combating terrorism also bodes well for consumer confidence and the U.S. economy. Gains in the Asian economy would benefit the state s export market; however, this aspect of the state s wood products economy remains less certain at the end of Any improvement in the Asian economy would benefit the wood and paper markets in general. Any potential changes in National Forest timber harvest policy by the Bush Administration have been postponed as a result of the events of September 11th. As the war on terrorism continues, we will probably see a corresponding increase in the attention given to domestic policy issues. While it is unclear to what extent, if at all, the Bush Administration will advocate the increased harvest of timber on public lands, it appears likely greater attention and support will come from the administration for restoration and rehabilitative cutting on public lands over the next few years focused around the removal of additional timber as a byproduct of other management activities. However, recent research suggests the harvest of any timber from federal lands even through restoration projects will likely remain a highly conflictual issue throughout the West. College of Agriculture and Home Economics Copyright 2002 Washington State University WSU Extension bulletins contain material written and produced for public distribution. You may reprint written material, provided you do not use it to endorse a commercial product. Alternate formats of our educational materials are available upon request for persons with disabilities. Please contact the Information Department, College of Agricultural, Human, and Natural Resource Sciences, Washington State University for more information. You may order other publications from the WSU Bulletin office, , or online Issued by Washington State University Cooperative Extension and the U.S. Department of Agriculture in furtherance of the Acts of May 8 and June 30, Cooperative Extension programs and policies are consistent with federal and state laws and regulations on nondiscrimination regarding race, sex, religion, age, color, creed, national or ethnic origin; physical, mental or sensory disability; marital status, sexual orientation, and status as a Vietnam-era or disabled veteran. Evidence of noncompliance may be reported through your local Cooperative Extension office. Trade names have been used to simplify information; no endorsement is intended. Published May Subject code 400. X MISC0484E 8