The Changing Supply Choin

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They do so because the number of dollars they earn per acre increases as they sell larger logs. As prices for pulpwood increase, however, some landowners will begin harvesting their timber earlier, at pulpwood sizes. Building on a conservative estimate once again, if pulpwood prices rise to within 40Vo or 50Vo of sawtimber prices, the average age of a southern pine at final harvest could move from 2'I years down to 22 years. Larger class sizes-those used to produce lumber, plywood and veneer-will become rarer as a result.

What does this mean for the building products industry?

Expect intermittent shortages. Due to the increased demand for pulpwood and a decreased supply of sawtimber, anticipate periodic and local shortages of raw materials-and hence building products.

Expect prices to climb. Manufacturers and sellers of products made from pulpwood, like OSB and some dimensioned lumber and specialty cuts, will pay more for pulpwood, which will lead to increases in the price of those products. Increased raw material prices will ilso challenge producers of sawtimber-based products. Lumber, plywood and veneer will all see jumps in price.

Expect some upside. Sawmills, in particular, will see increased market opportunities to sell secondary chips, the byproducts of milling operations. Once used only by putp and paper companies, these byproducts will see a strong increase in prices because bioenergy facilities will be competing for them. The additional revenue will help bolster cash reserves sawmills need to weather housing slumps in the future.

Inventory and supply chain management will be critical for success on the other side of this downturn. Knowing your market-including current timber and lumber prices, the progress of policy initiatives addressing the economic recovery, and forecasts for both the economy and pricingcould lead to opportunities near term. For instance, based on our forecast modeling, we expect a brief housing rebound tn 2009. The window of opportunity will be brief-a false start really-but those who can time their inventory to take advantage of this brief uptick could benefit.

The future has never been harder to predict. Where is the bottom of the housing market? Will the new administration's policies encourage home buying, infrastructure rebuilding, and bioenergy advancement? The new year will likely bring answers to these questions that we do not yet anticipate.

Clearly, though, because of the energy value of wood, energy will compete with other forest products for timber supply on a much grander scale going forward. And companies with a deeper understanding of the backside of the LBM supply chain will be able to manage procurementdespite shortages and price increases-while remaining profitable.

- Pete Stewart is president, c.e .o., and .f ounder of Fnrest2Market, Pineville, N.C., a company specializing in the wood supplv chain from the forest to the market. F2M currently offers timber pricing, benthmarking services,.forecasts and resource studies, and in 2009 v'ill launch its lumber prit.ing service. He can be reached ot pete.stewart@.forest2market. com or (704) 357-01 10, ext. I I