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BusinessWeek: January 11, 1993 |
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Industry Outlook: NATURAL RESOURCES
TIMBER COULD GO THROUGH THE ROOF This year should be better for both sectors of the $200 billion industry. Wood prices, already at record highs, should rise again, because production is lagging behind demand. Wood profits could climb as much as 43% in 1993, says Lynn. Paper profits will rise more modestly--by about 19%. SUPPLY GAP. It is the Northern spotted owl that is making Big Timber stand tall. Ever since the bird was declared an endangered species in mid-1990, industry executives have issued dire warnings that reduced harvests would constrain supply. The recession kept that from happening for a while. Then, an uptick in housing starts last year, plus Hurricane Andrew, stirred up demand for wood. The price of 1,000 board-feet of plywood rose from $243 in January to a record $352 in September before settling at about $338 on Dec. 18, says the trade publication Random Lengths. Framing-lumber prices zoomed from $241 in January to $318 on Dec. 18. Demand for wood is apt to grow even more this year, with housing starts rising to at least 1.3 million from about 1.2 million in 1992. And the mills will have trouble meeting it. A court injunction has stopped federal timber sales in the spotted owl regions of the Northwest. At current rates, logging will stop there by August, says Alberto Goetzl, a consultant to the National Forest Products Assn. Optimists in the industry hope President-elect Bill Clinton will make good on his promise to convene a timber summit early this year and ask Congress to let logging restart on a limited basis. Even so, Western production is likely to fall to 18.2 billion board feet in 1993, or 24% below its 1987 peak, says the Western Wood Products Assn. Suppliers elsewhere can't make up the difference. Southeast production is already near capacity, and Canada plans to cut wood harvesting because of environmental concerns. The beneficiaries will be major timber owners, such as Weyerhaeuser, Louisiana-Pacific, and Georgia-Pacific. The biggest losers will be independent, privately owned mills that depend on public timber. Many closed in 1992. Papermakers have been through agony, too: Their 1992 was nearly as bad as 1991. "It was a double-dip [recession] in our industry," says Robert C. Butler, chief financial officer at International Paper Co. After an investment binge, the U.S. is the world's lowest-cost producer: Exports rose 7% in the first nine months of 1992, despite weak overseas economies. But though many companies have delayed expansion plans, plant operating rates, now at 90%, are still below the 93% level needed to strengthen prices. "It's going to take several years of economic growth to generate enough demand to bring that business back to respectable profitability," says A.D. "Pete" Correll, president of Georgia-Pacific Corp., which lost $32 million in 1992's first nine months. Despite all this, the outlook is brightening for makers of linerboard, used in corrugated boxes. They tried twice in 1992 to raise prices and failed, chiefly because of high inventories. But this year, plants are at 95% of capacity, so a price increase may stick. Prices may also rise for newsprint and the coated paper used in magazines. Both are now at such low levels that analysts see no direction but up, especially if advertising resurges. Newsprint prices were so depressed last August that publishers, fearing more mill closures, encouraged a 5% increase. Even so, analysts say, up to 6% of North American capacity has closed since 1990. NOT BRIGHT WHITE. Some products are still in bad shape, especially pulp and uncoated white paper. Prices for pulp, the raw material in papermaking, are always volatile and dropped sharply in December when the currencies of Sweden and Finland, major pulp producers, fell against the dollar. Pessimists think that this year, pulp's price could fall below $490 a ton, the low it hit in 1991. White paper used in offices, once thought to be the industry's bright spot, is also suffering from too much capacity: Prices have fallen more than 30% since their highs in early 1989. And though International Paper has said it will close one money-losing mill, Champion International Corp. and Willamette Industries Inc. each are set to open a new plant this year. The size of this year's price increases for linerboard, newsprint, coated paper, and other grades will depend on the strength of the economy. But "when things start to snap, they snap back hard in this industry," says Chip Dillon, a paper analyst at Salomon Brothers Inc. In short, after three years in the doldrums, papermakers are looking for a merrier 1993. | |
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