Lumber Prices Slump With Housing Sales

The slowdown in the housing market has created almost a freefall in lumber prices, which were at their lowest weekly level in nearly five years as of mid-October.
The composite price per thousand board feet of framing lumber had fallen 325 percent to $280 per thousand board feet from $351 a year earlier, according to Random Lengths, an industry newsletter.
Although housing starts are off only by about 20 percent, they are the main driver for the steep decline in lumber prices, said Wade Camp, an economist with the Southern Forest Products Association at Kenner, La.
While the lumber industry had increased production in anticipation of 2 million housing starts, the latest Commerce Department report shows housing starts have fallen in five of the last six months to a seasonally adjusted annual rate of 1.67 million units.
Worse news is that the National Association of Home Builders forecasts single-family home starts will fall to 1.51 million for the year and decline further to 1.33 million in 2007.
There were 257 housing starts in Northwest Arkansas during the second quarter of 2006, down 29 percent from the 364 housing starts during the fourth quarter of 2005, according to the Skyline Report that is compiled by The University of Arkansas’ Center for Business and Economic Research, and paid for by Arvest Bank Group Inc. of Bentonville.
Low lumber prices could normally be expected to benefit home builders, but that’s not happening now because of the slow housing market, brought on partly by the Federal Reserve’s raising interest rates and by higher oil and gas prices, as well as by other factors.
The net result is that the low prices have forced producers in Arkansas and across the nation to suspend or cut back on production by temporarily shutting down mills.
“It’s a bloodbath,” said Steve Anthony, president and chief executive officer of Anthony Timberlands Inc. of Bearden. “It’s the worst industry recession in the past 40 years.”
It could get worse, he said, and a number of small companies won’t make it.
“This is the third recession in the past six years, so the lumber companies aren’t going into this fat and happy,” Anthony said.
Lumber has always been a cyclical business. Lumber companies used to have four to five good years and then one or two bad years, Anthony said, but that cycle has changed — there are now three to four awful years, followed by one or two good years.
The main problem, however, remains oversupply. In the past decade mills have had to upgrade to remain competitive. Those upgrades would cost between $10 million and $20 million, Anthony said. With the new technology came the ability to produce more lumber, which meant more volume on the market — and excess supply.
The only solution is to match supply with demand. And to do that lumber producers are temporarily closing mills or curtailing production by eliminating shifts or overtime or going to four-day workweeks.
The list of lumber producers in the state forced to trim production includes the big out-of-state operators such as Weyerhaeuser Co., Potlatch Corp. and Georgia-Pacific Corp., as well as Arkansas-owned companies such as Anthony Timberlands, Deltic Timber Corp. of El Dorado, Bean Lumber Co. of Glenwood, Travis Lumber Co. of Mansfield and Anthony Forest Products Co. of El Dorado.
Steve Anthony shut down the Bearden Lumber Co. plant for 60 days beginning Sept. 15, putting 225 people temporarily out of work.
In August, Potlatch closed its Prescott and Warren sawmills, affecting about 200 workers at each site.
Although back up and running, Potlatch last week eliminated its third shift, which affected about 42 positions. On Oct. 12, the company shut down its Warren sawmill for an indefinite period.
Also in August, Georgia-Pacific temporarily closed its El Dorado mill, which employs about 130 workers.
Last month Weyerhaeuser closed its Mountain Pine plywood and veneer mill for a period, affecting 334 workers.
Bean Lumber’s production cut resulted in its 155 employees working only three days a week.
Aubra Anthony, president and chief executive officer of Anthony Forest Products, said he’d reduced hours to avoid a buildup in inventory in hopes of preventing massive layoffs.
“It’s safe to say,” Aubra Anthony said, “that this is not a short-term spikedown. It will take some endurance to survive. Many won’t.”
He sees the situation lasting another 18 to 24 months.
“The industry is very sick and it’s going to be for some time,” he said.
Arkansas has about 20 major pine sawmills, which provide jobs for 2,500 people.
The wood manufacturing industry as a whole employs 13,600, but the state Department of Workforce Services predicts that number will decline by more than 350 by next year. At least 700 workers have been affected by production cuts since August.
One development that could improve the industry’s outlook is the new softwood lumber agreement between the United States and Canada that took effect on Oct. 12.
The agreement ends a four-year dispute over the lumber trade.
The Coalition for Fair Lumber Imports had speculated that Canadian suppliers contributed to the falling prices by increasing shipments to the United States before the agreement went into effect.
The United States has long argued that Canada and its provinces unfairly subsidized lumber exports.
In what could be a blow to the already suffering lumber industry, however, the National Association of Home Builders, meeting at St. Petersburg, Russia, encouraged the Russians to boost exports of softwood lumber and other wood products to America.
Such a move would benefit home builders, who claim that environmental and regulatory policies have reduced timber harvests from public lands and that the United States cannot meet the demand for lumber.
Last year, more than 38 percent of the lumber used in this country was imported, most of it from Canada.
The new softwood lumber accord with Canada, the association says, will create a complex system of border taxes and quotas that will artificially raise lumber prices during periods of normal or slow demand, making housing less affordable.
Since the United States lost most of its argument in the case, Canada will get back much of the money America has been collecting on duties from the Canadian lumber sales.
But that nation’s lumber industry is suffering as much as, if not more than, America’s, Aubra Anthony said.
Although the lumber industry is the most visible victim in Arkansas, the declining housing market is taking its toll on other businesses that depend on home starts: the home builders themselves, but also cabinetmakers, air-conditioner makers, plumbing manufacturers, window makers, paint companies and wallboard and insulation manufacturers, as well as anyone else who makes products used in home building.
Prices of oriented strand board, paneling made from compressed wood and used for walls and roofs, have fallen 24 percent in the third quarter to their lowest prices ever.
The lumber industry is just entering its fourth quarter, which historically is the weakest for lumber sales.
Aubra Anthony said the housing market was in “cardiac arrest.”
Lumber companies face two painful questions: How long will the slowdown last, and will they survive it?