EconSouth (First Quarter 2009)
Forest Products Industry Has Deep Southern Roots
The Southeast's generous canopy of trees not only contributes to the region's beauty but has given rise to an industry that generates billions of dollars and employs thousands of people. Behind all that bark is a lot of economic bite.
Even in an age of sprawling metropolitan areas, timberland covers half or more of every Southeastern state except Florida. Alabama, Georgia, and Mississippi are nearly two-thirds blanketed in trees. Those forests are more huge pine tree farms than untamed wilderness, though, as the timber is raw material for an array of products from the obvious—plywood, boards, and cardboard—to the not-so-obvious—diapers, LCD screens, and sausage casings.
The forest products industry is one of the region's oldest (see the sidebar). Northeastern lumbermen first turned their attention south in the late 1800s after the "cut out and get out" logging practices of the day first depleted the forests of the Northeast and then those of the upper Midwest. More than a century later, advanced forest management strategies, technology, consolidation, and globalization have transformed the industry. And today, the global recession is testing it as nothing has since the Great Depression.
A Southern stalwart
Forest products are especially significant in Georgia and Alabama. In Alabama, where timber covers 71 percent of the state, the industry employed about 40,000 people in 2007, and shipments from there in 2004 were valued at $10.4 billion, according to the American Forest and Paper Association (AFPA). The industry is even bigger in Georgia, the largest state east of the Mississippi River. The state is nearly two-thirds forested, and the related industries employed more than 50,000 Georgians in 2007; industry shipments in 2004 totaled $14.4 billion, according to the AFPA.
Paper mills, veneer plants, sawmills, lumberyards, and, of course, pine plantations are commonplace across the Southeast. In 2007, just under 1,000 paper and wood products manufacturing plants operated in the region, according to the AFPA. And five major ports—Miami, New Orleans, Mobile, Savannah, and Tampa—shipped $3.3 billion worth of wood and paper products overseas in the first 11 months of 2008, according to the U.S. Department of Commerce.
Fewer felled trees mean falling revenue
Along with demand, lumber prices have plummeted. Nationwide in January 2009, average prices for lumber used to frame houses were down 21 percent from a year earlier and 58 percent lower than the August 2004 high, according to Random Lengths, an industry newsletter. This development has left the South's lumber producers in a bind. Regional production was down by about a third late in 2008 from the year before, and the coming months offer little hope of improvement, said Debbie Brady, president of the Southeastern Lumber Manufacturers Association. The Southern Forest Products Association estimates that 2008 lumber production in the South was the lowest since the 1991–92 recession.
Many mills have furloughed employees and reduced operating hours. While those cutbacks lower costs, they also limit the effect of efficiencies that are critical in producing a commodity that is sold on price. The less produced, the higher the average cost.
"So the challenge is twofold," Brady said. "How do you find a spot where you can [operate] and still have enough efficiencies? It's going to take a really sharp operator to get through this." So far, the tonic that lumber producers typically turn to when new construction slows—home remodeling and renovation—has not materialized, said Tom Harris, professor at the University of Georgia's Warnell School of Forestry and Natural Resources and publisher of a nonprofit industry newsletter, Timber Mart-South.
"The manufacturers are just limping along," Harris said. "And what production they're doing is right at break even."
Technology's benefits branch out
Indeed, you're more likely to see an old-fashioned, giant circular-saw blade on the wall of a theme restaurant than in a modern sawmill. Today's advanced mills employ machines that X-ray logs to find knots, measure the space between rings, and generally determine the quality of the wood. Lasers and cameras scan almost 600 feet of logs per minute. Those cameras produce images on computer monitors, including diagrams suggesting how to cut a log—for example, a log might yield a two-foot-by-10-foot plank from the middle and pieces of different dimensions farther out. An extra two-by-four might come out of the edge of an odd-shaped log. Each approach has the same objective: to waste nothing.
"It's an intensely technical industry now," Brady said.
As the housing slowdown takes its toll on lumber producers, the broad-based recession is also hurting paper and packaging makers. Many of the South's pine trees become cardboard packaging or containerboard because the wood's long, tough fibers are well suited for that type of material.
As economic activity has slowed, however, businesses and consumers need fewer boxes. In December 2008, containerboard production in the United States was down 26 percent from December 2007 while production for all of 2008 was down 3.7 percent from the year before, according to the AFPA. Amid the difficult conditions, in January this year, Chicago-based Smurfit-Stone Container Corp., the second-largest maker of corrugated packaging in North America, filed for bankruptcy protection.
Although the present and immediate future look bleak, the long-term outlook for Southern paper and lumber production is reasonably bright, experts contend. The key for paper and paperboard makers is efficient manufacturing, which comes from using larger, more sophisticated machines that produce more than older, smaller ones, Harris said. Such advancements help to explain why some mills dating from the 1920s and '30s in St. Mary's, Ga., St. Joseph, Fla., and Mobile, Ala., have closed in recent years.
As long as Southeastern mills keep their machinery up to date, they should benefit from being near both plentiful supplies of wood and huge markets in Europe and the northeastern United States. And they are just as close to Japan as their South American competitors, Harris said.
"There's a competitive advantage, to some extent, if you have big, efficient plants in the southern United States," said Lee Thomas, chairman and chief executive officer of Rayonier Inc., a Jacksonville, Fla.–based forest products company and a member of the Federal Reserve Bank of Atlanta board of directors. He noted that the same advantages of location that paper makers enjoy apply to another Southern pine product—so-called fluff pulp, which Rayonier produces for use in diapers, feminine hygiene products, and other absorbent products.
Winds of change blow through the industry
For one, companies have for some years been focusing more sharply on niche markets, and that focus is expected to intensify, Thomas said. The age of the integrated behemoths that own millions of acres of trees and make everything from lumber to cardboard boxes to copier paper and labels has largely passed. Giants like Georgia-Pacific, Mead Westvaco, and International Paper began selling vast land holdings in the 1980s and '90s. Georgia-Pacific owned six million acres of timberland when Thomas went to work there in 1993 and owned virtually none when he retired as president of the company in 2005.
International Paper once owned millions of acres of Southern timberland and manufactured a full range of forest products—but no more. The company began a transformation in 2005, selling 3.8 million acres of Southern timberland in 2006 and 13 lumber mills, including seven in the Southeast, in 2007. Now, International focuses on uncoated paper and packaging.
Experts such as Ian Munn, professor of forest economics and management at Mississippi State University, and Thomas say large-scale sales of timberland, globalization, and consolidation represent fundamental shifts in the forest products industry. After selling timberland, the paper and wood producers no longer own their raw material. Instead, they buy it on the open market, sometimes under agreements with the investor groups that bought their lands.
That model is still new enough that industry watchers have not yet concluded how difficult it will be for major producers of paper to wring efficiency from a complex supply chain—made up of links such as harvesting timber, buying it, trucking it, and converting it to paper—that they no longer completely control. "The market works, and it will happen," Harris said. "It's just different than, say, our South American competitors, who still control that whole process."
The few forest companies that have chosen to maintain major land holdings have made changes of their own. Rayonier is one of three major forest products firms that have become real estate investment trusts, mainly because of favorable tax implications. Rayonier owns, leases, or manages nearly 2.6 million acres of timber and land in nine U.S. states and New Zealand and sells timber for use in markets including pulp, paper, lumber, and other wood products.
In partnership with real estate developers, the company also develops property that it deems more valuable than for growing timber. In particular, Rayonier's real estate development subsidiary, TerraPointe LLC, is working to secure development permits for 200,000 acres it owns along the Interstate 95 corridor between Savannah, Ga., and Daytona Beach, Fla.
This sort of change is nothing new. The forest products industry, especially the paper and packaging components, has been consolidating for some time, propelled by gains in cost and efficiency, much like other industries. Mead Westvaco resulted from a union of Mead and the West Virginia Pulp & Paper Co. And International Paper acquired Champion, Union Camp, and Federal Paper Board. Georgia-Pacific, which in 2005 was acquired by privately held Koch Industries, bought Fort James, itself the result of an earlier merger.
From Southern forests to the world
For instance, his company, Rayonier, generates 40 percent of its revenues outside the United States. Industrywide, exports of U.S. paper products have climbed considerably, fueled in part by a relatively weak dollar and strong demand from emerging markets. Through November 2008, exports of pulp wood and wood pulp, paper and paper base stocks, newsprint, and other paper products totaled $38.22 billion, more than the total for all of 2007: $37.31 billion. The 2007 total was up 51 percent from 2001 and was more than double the industry's exports in 1991, according to the U.S. Bureau of Economic Analysis.
Going global has been good for paper makers as much of the growth in demand for their products has come from developing economies. As living standards improve, demand generally surges for products such as bathroom tissue, Harris said. In addition, China has been a major consumer of "recovered paper," or waste paper that is recycled into newsprint and other products. Yet in the global economic slowdown, Chinese demand has also slackened, Harris said.
While exports have grown, so have imports, Thomas pointed out, forcing domestic producers to sharpen their operations. The worst economy in perhaps 70 years is also putting the forest products industry to the test. Coming out of the current recession, Thomas predicted the industry will be "more consolidated, more focused, and more global."
This article was written by Charles Davidson, a staff writer for EconSouth.