Outlook on hardwood lumber

By Mark Barford, CAE, CF President Appalachian Hardwood Manufacturers, Inc.

IDRODUCTION of hardwood

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I ber began in this country when the first settlers used hardwood for repairing their ships for the return trip to Europe. Over the years, the industry has had many ups and downs, and a look at the current hardwood lumber business climate reveals a number of challenges.

Changes over the past few years have been catastrophic to some companies, with hundreds of sawmills going out of business and others struggling. These struggles have caused some shifts in the way the industry does business, and a shift to new customers that are buying hardwoods. Yet while annual hardwood lumber production today is about 207o less than in 2000, it is still above the 40 year production average.

The hardwood industry is dependent upon a forest resource that primarily it does not own or manage. There are nearly 10 million individual hardwood timber landowners providing the vast majority of trees to be harvested. The good news is that while the timber resource pie is being shared by more owners, the total size of the pie is increasing dramatically. The U.S. Forest Service estimates that hardwoods are generally growing at about twice the rate they are being harvested, with average tree size increasing as well. We know we will have trees to harvest in the future despite the limitations imposed by government regulations. In short, the U.S. has a healthy, growing, well managed forest, that will sustain the hardwood lumber industry for decades to come.

And what species grows in the forest? Primarily oak, and lots of it. The

Forest Service says that 38Vo of the standing forest is oak. Over the years, the wood consumers have learned to use oak for many structural and decorative purposes, and it is the wood of choice for floors, furniture and cabinets.

The markets for hardwood lumber have seen changes in recent years. The 11.5 billion bd. ft. of lumber production last year indicates that after pallets, the number one market for lumber is now flooring. Furniture use of hardwoods is down 507o from just five years ago, and that is a market unlikely to return. The Chinese now produce over 60Vo of the wooden furniture sold in the U.S., with many new factories yet to be built in China, as well as in Vietnam, Indonesia and Malaysia.

Surprisingly, export markets have not kept pace. Although exports to China have increased dramatically, they have been offset by the decline in other export markets to countries such as Japan, Korea and Germany. Exports in total are still about 107o of our total lumber production, and have remained at about that level over the past 20 years.

The tremendous growth in hardwoods for flooring, cabinets and decorative moldings, particularly in the remodeling market, have picked up some of that lost demand. The traditional industrial markets, including pallets and ties, has remained fairly steady, with the pallet decline due to the increase in the number of recycled pallets utilizing less new hardwood. American woods are still highly favored in new construction projects around the world that want to appeal to an international clientele. such as hotels and offices.

Like many manufacturing industries in the U.S., the hardwood lumber business has some challenges in the future in order to keep production in the country. Some of those challenges include:

Cash flow drives business (With high expenses for new machinery, many companies have had to use bank loans to grow, and find the need to turn over their money quickly.)

. Overhead costs escalating (The costs for taxes, health, insurance and safety compliance are increasing much faster than company profits.)

. More timber growing, but less available to cut (Despite the tremendous expansion of the forest resource, trees are becoming less available for harvest due in part to forests being subdivided to parcels that are too small to operate in.)

. Government regulations

Trucking and shipping issues r International competition

A Look Ahead

The hardwood lumber industry has been in a consolidation phase for the (Please turn to page 34)

Town Wooing D-l-Yer Stores

The city of Frisco, Co., has a prime 9.4-acre parcel for sale and is courting several developers representing competing home improvement stores.

So far, six developers have submitted formal proposals. The town council hopes to narrow the field down to a single, best candidate in time for voters to decide in a November election.

The early favorite, as ranked by Frisco's crtizen economic development committee, is a 130,000-sq. ft. Home Depot, since its proposal also includes affordable housing, a playground, recycling drop-off site, added buffer distance to nearby wetlands, and "environmentally sensitive design principles."

Close behind are a 138,000-sq. ft. Lowe's Home Improvement and a 115,000-sq. ft. Wal-Mart, which might lease part of the property to another big box retailer such as Home Depot or Lowe's.

The long-shot isa 15,000-to35,000-sq. ft. Ace Solutions store that would occupy 2 acres of the site.

Activists Make A Buck

Eight nonviolent protestors who had pepper spray swabbed in their eyes by Humboldt County and Eureka, Ca., law enforcement officers were awarded $l each in damages.

The protests took place in 1997, at then-representative Frank Riggs' Eureka office, at the headquarters in Scotia of the Pacific Lumber Co., and on PeLco timberlands in Bear Creek. The plaintiffs were protesting the Headlands agreement, which allowed cutting of old-growth redwoods. Pepper spray was used when the activists chained themselves together to resist arrest.

"We're obviously delighted that they found this application of pepper spray was unreasonable excessive force," said attorney Tony Serra. "The plaintiffs were never in it for the money. We won this on principle."

Hardwood Outlook

(Continued from page 32 ) past 50 years. Some historians estimate there may have been at one time over 10,000 commercial sawmills, and the number is now under 500. That trend will continue, but with the changes in technology, overall production levels should not vary much.

This consolidation allows primary wood consumers to do more "one stop" purchasing as one company now has a greater variety of species and products.

With the new technology also comes increased accuracy in production, and more ability to meet the needs of a particular customer. The addition of drop sorters and limited secondary processing allows lumber suppliers to work with customers better. Better training for mill workers and loggers makes hardwood lumber production a more desirable profession, and the addition of new personnel and systems bodes well for future competitiveness.

The hardwood lumber industry has come through some tough years better prepared to meet the needs of our customers in the future. With a plentiful resource of well-managed forests, a modern updated industry, and companies understanding that they need to adapt to change, the future looks very positive.

- Based in High Point, N.C., Appalac hian Hardwood Manufacturers is an 80-year-old trade association with 200 members in l2 states that promotes Appalac hian- g r ow n hardw ood lumber.

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Sears May Shed Orchard

Sears Holdings Corp. plans to sell its Orchard Supply Hardware division and refocus on the opportunities presented by the March 2005 merger of Sears and Kmart. The retail chains merged to fight off competition from Wal-Mart.

San Jose, Ca.-based OSH's 82 home and garden centers operate throughout California, selling about 45,000 items in an average of 41,000 sq. ft. The chain had sales of $532 million in 1996, when its 60 stores were purchased by Sears.

In both size and national reach, OSH has been dwarfed by Home Depot and Lowe's, whose stores average more than 100,000 sq. ft., with another 20,000 to 30,000 sq. ft. for outside garden areas.

"We believe Orchard would be a good fit for big-box home improvement retailers, such as Home Depot or Lowe's, looking to fill in markets surrounding their core stores and spur convenience-related sales," said Gary Balter, an analyst at USB Securities. He said that the company's strong cash flow also could make it attractive to financial buyers. Balter estimated that OSH could sell for as much as $300 million.

"I've studied the boxes for years. In searching out our niche, we choose not to fight the price battle. We fight the quality and service battle."

- Scott Williams, president Brown Lumber Co., Traverse City, Mi.

Penofin Says No To Giants

To keep jobs in the U.S., Penofin Performance Coatings, Inc., Ukiah, Ca.. fi red its biggest customer in January to concentrate on distributing its wood finish products to independents and smaller regional chains.

"We were forced to make a choice," said Castle Newell III, company president. "Move our manufacturing overseas to continue to do business with one of the largest retailers in the nation, or say good-bye to this customer and keep those jobs from moving offshore."

The problem, said Newell, is that the big boxes want more rebates, more time to pay, have added surcharges, and make monetary demands that have forced American businesses to send manufacturing jobs elsewhere.

Fortunately for companies like Penofin, local stores that focus on customer service are becoming more popular with shoppers. "We were apprehensive at first, but to our amazement we have added hundreds of independent stores across the U.S. and Canada," said Dr. Barbara Newell, c.e.o. and founder.

"We are a family-owned company," said Dr. Newell. "Our children, many of our employees' children, neighbors and friends have worked here. We are not about to make a buck at the expense of our employees."