Pandemic is a word that I’m not sure I could have spelled three months ago. Unfortunately, we are now all too familiar with the term and with COVID-19. I don’t think any of us saw this one coming, and they sure didn’t teach us about this in forestry school. As we deal with the general uncertainty in the world and more specifically in the forest industry over the past few months, many market conditions have changed, but basic business fundamentals have not.
Principles of Supply and Demand
The principles of supply and demand are one of the basic foundations of a free market economy. During normal times, supply and demand dynamics generally move in balance. No doubt, we all know the general dynamics of the supply and demand relationship and how prices are impacted. When supply goes up and demand stays constant then prices move down and so on as different economic scenarios play out. When thinking of industry supply and demand dynamics over the past several months, two factors have materially changed. Markets for wood products have dropped sharply and markets for pulp and packaging products have risen sharply. These contrasting market changes and the resulting impact on timberland owners, forest products manufacturers, and logging contractors are more intertwined than one might think.
It is easy to understand why the demand for building products suffers as construction takes a sharp downward movement during periods of economic uncertainty. Recent announcements from wood products manufacturers (lumber, OSB, plywood) share that most companies are curtailing production between 25% and 100% in the near term. Such a sharp drop in production coupled with the uncertainty of future operations has significantly impacted the raw material supply chain. This has placed landowners, wood suppliers, logging contractors, and truckers in a fog without clear direction on how to navigate. Future mill operating decisions appear to be very dynamic and, in most cases, operating hours are being managed on a week to week basis. Uncertainty abounds!
Here are are a few supply and demand observations resulting from the current reduction in wood products manufacturing:
- Fewer operating hours translates to less log volume being consumed. While varying greatly, most wood product manufacturers are decreasing log consumption 25% to 50% in the near term.
- Fewer operating hours translates to less residual by-products being produced by lumber manufacturers. These by-products are key sources of fiber for pulp and packaging manufacturers and pellet mills.
- Fewer operating hours translates to less demand for deliveries from wood dealers, logging contractors, and truckers leaving the extra logging capacity searching for a new market to supply.
While the current outlook is mostly negative for wood products manufacturers, there is very bright news for the pulp and packaging sectors of our industry. If you are like me, the Amazon fairy shows up at your house multiple times a week delivering something of need. You have also likely seen the many news headlines of late where Amazon, Kroger, Walgreens, and others are adding many jobs. Jobs at these “essential need” distributors and retailers mean more goods are being demanded; more goods mean more shipping containers and boxes. Then there is the perceived toilet paper shortage. For reasons unbeknownst to any of us, toilet paper demand has skyrocketed. Southern Yellow Pine is one of the best raw materials used in pulping production for tissue manufacturers. This provides an even brighter outlook when included with increased demand from the packaging sector.
Here are are a few supply and demand observations resulting from the current increased demand for pulp and packaging products:
- Increased demand from “essential need” distributors and retailers and in-home delivery of many other items (groceries, pizza, etc.) results in significantly increased demand for packaging products.
- Increased operating hours and operating rates at pulp and packaging manufacturers translates to more wood being consumed at these facilities. While varying greatly, some manufacturers are increasing production 10% or more by adding operating hours or by rescheduling annual mill maintenance outages from the spring to the fall.
- Rapidly changing residual by-product availability is creating some challenges for fiber consuming mills. Sawmill residuals are decreasing while consumption at pulp and packaging mills is increasing.
Now that we have reviewed the rapidly changing supply and demand dynamics within important sectors of our industry, a logical question for landowners and their managers is “how do these changes affect my business?” Our next article in this series will discuss market impacts resulting from these changes in supply and demand dynamics.
Until then, stay safe and healthy.