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

BY NANCY COLE ARKANSAS DEMOCRAT-GAZETTE

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 more than 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 weeded out, 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 Dorado-based 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."

This article was published 04/29/2008