1/15/2001

KUFM / KGPR

T. M. Power

 

More Mill Closures: Rational Adjustments to Low Prices and Excess Supply

 

The closure of the Owens and Hurst lumber mill in Eureka adds to the economic anxiety many Montanans have been feeling as one chunk after another of our limited industrial base shuts down due to a variety of complex market forces.

            As usual, the emotional energy generated by the pain and disruption that job losses bring to workers, families, and communities has been used by various special interest groups to advance their own political agendas.  The resulting babble and rancor simply adds to the confusion and uncertainty most of us feel.

            One way to get a more accurate perspective is to look outside the region and to national business analysts who do not have particular local political axes to grind.  What we experience in Montana often does not have its origins in Montana.  Because we are integrated into the national and international economies, we are regularly buffeted by economic forces that have nothing at all to do with particular decisions made in Montana.  Blaming local policies you happen to disagree with for changes that are driven by economic forces originating in international markets is simply self-interested scapegoating.

            Lumber mills are shutting down across the nation. Both areas and mills that do not rely on National Forests for timber supply are being negatively impacted.  Consider California.  In early January, Sierra Pacific, California’s largest timber company and timberland owner, announced the shutdown of three of its 14 mills.  Sierra Pacific pointed to plummeting wholesale lumber prices that in early January were half what they were in 1999 and honestly explained that “It just didn’t make sense to be cutting up high-value logs and then selling the lumber at low prices.”[1]  Jim Hurst in Eureka must have been thinking along the same lines since he explained, as he temporarily closed his mill, that “the mill has too much rough lumber on the shelves and must reduce inventory.”[2] Clearly he could sell it, but probably only at a loss.

Rather than blaming the US Forest Service for the problem, timber industry analysts have pointed the finger at private forest landowners like Sierra Pacific.  Resource Information Systems Inc., an international forest industry analysis firm based in Massachusetts, put it this way: Rising national timber prices during the 1990s created incentives for private forestland owners to begin managing their land for commercial harvest and for timber companies to expand their own forestland holdings and accelerate their harvest of them.  That increased private harvest when combined with reduced exports of American timber to Asia “completely replaced” the declining federal timber sources.  National timber production capacity on private lands rose pushing prices downward, according to these forest industry analysts.  That private timber “capacity is going to continue to increase over the next couple years while demand is likely to decline.”  That may keep lumber prices low for some time.[3]  Wall Street analysts are projecting continued mill closures, layoffs, production cutbacks, and low prices for much of the year 2001 across the nation. This is not a problem unique to Montana or to firms dependent on federal timber.[4]

Montanans are used to industrial firms responding to over-supply and low prices by temporarily cutting back or shutting down.  Regional aluminum plants do that, the paper mill outside of Missoula does that, mining and smelting operations do that, farmers and cattle producers do that, and, of course, lumber mills have always done it too.  In the face of excess supply and low prices, the appropriate strategy is not to continue producing, but to cut back.  The reduction in supply brings demand and supply back into balance and prices ultimately begin to recover and mills can return to full production.  Montana’s forest products industry has been though these market driven closures for as long as we have sold our lumber products into national markets.

Despite efforts to link the difficulties that lumber mills are currently facing to the Clinton roadless initiative, such partisan political bickering makes two fundamental economic errors.  First, it assumes the problem lumber mills face is lack of access to raw material rather than a surplus of raw material that is driving prices down.  Second, it assumes that gaining access to the most costly sources of supply at the very time that the prices mills can get for their products are at record lows would some how help the mills.  Roadless area timber is costly because it is located in isolated, steep, remote timber stands that require new road systems and special harvesting techniques; to compound the problems with these areas, in general, they are dominated by relatively low valued trees.  This is the opposite of the type of supply that would currently be useful to mills, at least if they were asked to carry those costs rather than foisting them off on US taxpayers.

Fortunately, some help is on its way for Western lumber mills in the form of a virtual flood of timber salvaged from the forest fires of this last summer.  That salvage is about to reach the market from private, state, and federal lands.  While Western mills may benefit from these cheap sources of supply because it makes them more competitive, mills elsewhere in the nation may see prices driven down even further forcing even more of those who do not have access to unusually low cost timber supplies to shut down.

Riding the roller coaster of international commodity prices is an unavoidable feature of a natural resource economy.  Our farmers and ranchers, our mines and smelters, and, of course, our forest products mills have been doing it for a century or more.  The consequences are not pleasant for any of us.  The economic instability and insecurity that these commodity price cycles bring to our communities ultimately make them and their residents poorer.  That is the reason that most of those over-specialized communities are currently focused on trying to diversify their economies.

Sacrificing the natural landscapes surrounding these communities in a last desperate attempt to keep mills operating even when market conditions indicate that reduced production is appropriate, undermines those diversification efforts by making the community less attractive to new businesses and residents.  It is part of a death-spiral strategy rather than a path to revitalizing our communities.  Yet that is the direction in which the current political scapegoating is committed to carrying us.


[1]Ed Bond as quoted in the Sacamento Business Journal, January 5, 20001, Celia Lamb, staff writer.

[2] Missoulian, January 9, 2001, p. B1, Michael Jamison.

[3] Paul Jannke, vice president of wood products, op. cit.

[4] Reuters,  December 26, 2000, Steve James, “Tough Year Ahead for Forest Industry.”