Traditionally, hardwood mills have always been slow in reducing production in the face of declining demand and sagging prices.
Sawmills commonly allow their inventories to grow while waiting for the market to improve. Inventory used to be viewed as good collateral against which money could be borrowed. Mills often paid unreasonably high prices for logs in relation to the selling prices of the cut lumber and production cutbacks occurred only when storage space was reaching a limit.
In a non-business-like fashion, sawmills were beset by the notion of minimizing their per-unit production costs. As declining production usually means higher per-unit-costs (because fixed costs must be spread over a smaller volume), manufacturers were reluctant to reduce their output.
Whatever the reasons for maintaining a high level of output, the slow response by mills to declining demand conditions invariably resulted in considerable overproduction, thereby prolonging any price erosion and increased financing costs.
The philosophy of sawmill owners regarding timber and log purchases has changed in recent years. Businesses are now realising that planning production in the "old-fashioned" way can be a fallacy. Profit considerations have replaced production considerations as the primary focus of business and this has necessitated a much closer watch of market trends.
First slowdown in decade
The hardwood industry is presently in the midst of its first slowdown in nearly a decade. Unlike in the past, the current downturn has hastened an overall decline in production especially of less popular species. It is generally recognized that higher production would lead to lower prices, which could more than cancel the benefit of a decrease in per-unit-costs.
If companies cannot make a profit, they are now refusing to buy logs at elevated prices, even at the risk of running out of stock. In fact, some mills have shut down recently and others have reduced operating hours or the number of shifts.
The declining lumber production is mainly on account of production cuts in smaller sawmills. They are more flexible than large corporations. It is easier for them to change direction, reduce production, or closedown for a while in order to adjust to sagging demand conditions. Large companies lack the agility of small businesses due to their size and fixed overhead requirements. If they are heavily leveraged - as many of them are - fixed debt servicing charges may also preclude any short-term cutbacks in production. Furthermore, many large sawmills have standing timber that needs to be cut due to contractual time limits.
The reduced supply which could be observed in recent months is however, not only based on mills' voluntary production cuts.
Some of the production decline is due to the poor profitability in the saw-milling industry. Customer payments have slowed to the point where many companies lack the capital to buy replacement logs.
Furthermore, rising energy prices lifted transportation and operating costs. Sawmills using natural gas for heating their kilns are especially hard hit. With kiln-dried lumber prices down, many kiln operators are no longer profitable and - as a result - they are reducing their output. It appears that the energy problem will be around for some time.
Also contributing to lower production is the fact that banks are more cautious in approving loans to hardwood operators. Contrary to earlier times, large inventories are now often considered a liability.
Weather another factor
Finally, weather conditions have impacted negatively on lumber production. The wet winter weather has hindered logging throughout the eastern hardwood producing regions earlier this year.
In addition to the short-term causes for production cutbacks, there is one powerful long-term force contributing to the industry's declining output. The traditional family business in the hardwood industry is becoming less and less prevalent. The younger generation has lost interest in logging and saw-milling. This is caused, in part, by the perception that not much money can be earned in this industry.
There are literally dozens of sawmills offered for sale by owners ready for retirement. While larger operators may purchase some of those companies, other are liquidated and production capacity will be lost permanently.
For these reasons output of hardwood lumber has fallen about 2-4% in the last two months, or 300-500 million board feet on an annualized basis. Hardwood production will likely continue to decline. The traditional summer shutdown period of sawmills will probably be longer than normal this year.
Under the present situation of lackluster demand, production cutbacks are the only weapon to add some price support to hardwood lumber.
The recent decline of hardwood prices would have been much steeper were it not for these production cuts. The overall price index for American hardwood lumber reached a temporary high in May of 2000, from where it dropped by some 3% until now.
Prices of lumber with a higher value-added - such as dressed lumber and dimension lumber - also stared to soften early this year, but prices for these products are still quoted higher than twelve months ago.
ITTO are TIMBERWeb Media Partners
TIMBERWeb shortlisted for top industry award
TIMBERWeb, the leading global timber B2B eMarket, has been shortlisted from 580 entries for the New Media Age Effectiveness Awards.
The judging of the awards is now complete and the company could be named as the overall winner in the Best Use of Web category.
The judges examined the business objectives, strategy and success of each entry before making their decision. The winners will be announced at a ceremony in London next month.
Ligna Plus Hannover exhibitors offer
The Ligna Plus Hannover exhibition was a great success for TIMBERWeb. Our team were able to meet in person dozens of existing members for the first time, who had travelled to Germany from all over the world. It was exciting to see you all.
We were also delighted to discuss the many business opportunities on TIMBERWeb to potential members too.
As a one-off promotion, all visitors or exhibitors at Ligna Plus are able to join TIMBERWeb and receive a 20 per cent discount on the Membership Cost - a saving of 80 Euros for a Trading Member and 128 Euros for Associate Members.
The offer closes at the end of May so please do not delay in logging on or contacting our sales team.
Join online and quote your Ligna Stand number to gain your special discount or email sales@timberweb.com for us to contact you (most languages spoken). We look forward to welcoming you as new members.
