EconSouth (Second Quarter 2007)
'The Last Few Years Have Been Very Good for Building Products'
An Interview With Lee Thomas, President and Chief Executive Officer of Rayonier
Jacksonville, Fla.–based Rayonier Inc. owns, leases, or manages 2.7 million acres of timber and land worldwide. Though raging wildfires in the Southeast torched a small portion of those holdings, new chief executive officer Lee Thomas can see through the smoke to a continued healthy future for the region's timber industry despite the downturn in new home construction.
EconSouth: How has the slowdown in housing construction affected the overall forest products industry?
Lee Thomas: The interesting thing is that you can't necessarily draw a direct line from the residential housing slowdown to impact on a particular segment of the industry—except for sawmills, which have been very hard hit. That absence of a direct connection is because timberland owners continue to enjoy a good, strong demand from the paper industry for certain kinds of timber like pulpwood. In the Northwest, there is also a fairly strong demand from Asia for whole logs. Now, for those companies with sawmills, plywood, and oriented strand board or panels, there's more of a direct effect. However, some of the impact on the panel industry, particularly plywood, has been offset by the strong commercial and industrial market. You have to look at all of those things when you think in terms of "What is the effect of a housing slowdown in the United States?" It may not be as straightforward as you would think it would be.
ES: What has the impact been on your company?
Thomas: The mix of Rayonier's core businesses—timber, real estate, and performance fibers—provides us with strength and balance throughout the economic cycle.
We are a major timberland owner, so the housing slowdown has been somewhat offset by strong demand for our timber from the pulp and paper industry and log export markets. Our real estate business—which has recreation, conservation, and development properties—has held up well due to the diversity and quality of our properties. Our sawmills have been hard hit, but with just three mills, lumber is a very small part of our company. Offsetting the impact of the housing slowdown is the exceptional strength of our performance fibers pulp business, where we are the world's leading supplier of high-value specialty cellulose fibers. So, overall, Rayonier is looking forward to another good year with earnings comparable to 2006, excluding special items.
ES: You mentioned that lumber markets have suffered the most.
Thomas: There's been a dramatic reduction over the course of the last year in the demand for lumber in the United States. Residential housing has been very strong over the last several years, and an inventory of housing basically has been built up. Now we're going through a supply-and-demand correction. Because you don't maintain a lot of inventory for lumber, there was a quick decline in pricing this past year, from very strong to very low. As a result, you saw a number of sawmills across the United States and Canada begin to curtail operations, with people getting laid off or working shorter hours. That's been going on at least the last six months all across the United States. But, as I mentioned, lumber is a very small business within Rayonier.ES: When the market for timber products is low, what options do you have?
Thomas: The advantage of timber is you don't have to cut it. You can continue to let it grow. It will grow and, in fact, increase in value over time. So people will pull timber off the market and let it grow until the market improves, particularly for what we call saw logs; that is, timber big enough to go into a sawmill, or a ply log, which is a larger tree that's going to go for plywood.
ES: With these multiple markets for timber, is one market more profitable for you than others?
Thomas: It is the building product side of things. If you look back a few years, you find that residential housing was very strong; commercial was also strong. So you had great demand, say, two years ago for our timber for building products, lumber, plywood, and oriented strand board. But you had some weakness on the paper side. Both parts of the market are important. I would probably say if you've got strong residential housing, that's the best part of the cycle. That outweighs the other parts of the cycle. The last few years have been very good for building products. But if you look back to 2002 or 2003, the industry was in a down part of the cycle on building products and paper.
ES: Is it possible to forecast the cycles for timber products?
Thomas: It's very difficult. I think everybody anticipated the housing boom certainly wasn't going to continue. Trying to determine when it was going to stop was difficult to forecast. The same is true of weakness in terms of paper and what the demand for paper is. And it's different for different types of paper. You're also dealing with the global marketplace. You don't just look at demand and supply in the United States because paper is traded all over the world. We try to keep up with as much information as we can on where new capacity is coming from and when we think it will be available in the marketplace. We also keep up with what's going on with the economy and what it means, whether it's for housing or paper demand. We try to anticipate, but it is far from an exact science.
ES: What is the effect of the wildfires in southern Georgia and northern Florida on your business and your industry?
Thomas: As of May 31, the record number of wildfires in the region had affected more than 600,000 public and private acres. A lot of the losses are on federal refuge land, the Okefenokee Swamp. Rayonier has had more than 60,000 acres affected, mostly in Georgia but some in Florida as well. The book value loss of our timber is estimated at $15 million–$18 million. No question, it's had an impact, but since we have 1.7 million acres in the region, only a very small percentage of our timberland has been affected.
ES: What can you do once a wildfire has affected your land?
Thomas: We started salvaging two and a half weeks after the land was burned. Even though a fire goes through, in some cases it can be very low burning so the trees are still in relatively decent shape. They'll degrade quickly and die over time so you have to get in there and cut them quickly if you're going to get anything. You clearly don't get the kind of return that you would on a non-fire damaged tree. But salvage is a very important part, at least from a business point of view, for us. Besides salvaging timber, we try to get the land ready to replant. It just depends on how the salvage goes as to how long it is before we replant. We may have to wait a year.
ES: Overall, how would you describe the condition of your industry in the Southeast?
Thomas: The forest products industry is in relatively good shape. There is good demand for pulp and paper products and good value for those of us who own timber and land in the Southeast. We see a weakness on the building products side of the industry, but we know that was due to a correction in housing that will change. Overall, I'd say, the industry is in good, sound economic shape in the Southeast.
This interview was conducted by Ed English, a staff writer for EconSouth.