Globalization

( C ontinued from page 22 ) ties to utilize the timber?

The hidden message in all this is a looming fiber shortage that is only now dawning on the usual analysts, but was quite apparent as long ago as 2005 for those with a global perspective and the ability to understand how these trends could affect local conditions. The signs were already there. Europe, until the temporary reprieve created by the latest storm, was in the throes of one of their worst log shortages in history. Combined with strong demand from their home markets and the oil-producing regions, the producers were hit with a30-40Vo increase in log costs over the last year. And with the new Russian export tax. it will eventually get worse. Chinese producers, very dependent on Russian softwoods from the Far East. have the same problem. Their raw material costs have skyrocketed by 70-l00vo in the same time period.

Think it won't happen here? Think again. The fiction of an eight-year cycle on the B.C. beetle killed log is only now being debunked. According to the latest reports coming from the University of British Columbia, once the pine logs die. there is on average a one to two year window to harvest and cut before sawmill yield becomes unmanageable. Many mills in Washington state are dependent on the B.C. coast for up to 3OVa of their log supply. This is one reason why Iog prices in the West have remained stubbornly high.

What is the industry reaction to this? In many cases it is to build more sawmills. Whether in Germany or Washington, the mentality seems to be the same: cut costs, use deep pockets, and be the "last man standing." In other words, more pressure on the same fiber basket.

A local distributor or dealer june be thinking, how does this affect me? My business is distribution and there will always be lumber out there! Here is how: When housing recovers (hopefully by 2009), the U.S., which accounts for 2O7o of worldwide softwood lumber demand, will once again be the global driver. In the absence of large supplies from either central B.C. or Eastern Canada, shortages are inevitable.

Will Europe or South America come to the rescue? European imports will depend on the home markets and Japanese demand as well as log costs and exchange rates. Don't count on Russia, as its problems with transportation infrastructure and Chinese demand will keep them from making a material impact any time soon. South America will be a supplier, but for non-structural products only as its super-fast-growing cycle does not allow the local softwoods to gain the fiber strength necessary to make construction lumber grades.

If you are still unsure of these trends, think about the big players who are buying timberland all over North America and taking it private or creating REIT's. These are very shrewd people who see what is coming and want to be positioned to take advantage of the higher prices. The "TIMO's," as they are called, are even now making an impact on log prices in the Northwest. Visionary operators are buying mills in the U.S. South because that is where the fiber will be in the future.

Compounding these difficulties will be the growing market for biofuel raw material. There is technology coming very soon that will make it much quicker and cheaper to break down wood fiber into the elucose compounds needed for ethanol refining. Wood pellet plants seem to be springing up everywhere. even in China.

So, how does this affect you (the dealer/distributor) and what can you do about it?

Iislrs:

. Shortages invariably force consolidation.

. Construction lumber will be more difficult to buy, especially for the smaller players.

. Prices will be much higher as China and others compete for raw material in the global marketplace.

. Higher prices over the long term lead to alternate products.

Possiile $tlategies:

Develop strong relations with suppliers who have the strategies and the financial wherewithal to change with the times.

Follow supply and demand trends closely, especially in Russia, China and the B.C. Coast to give you a heads up on looming shortages.

Always keep an eye out for new products and places to find those products, whether it be Tacoma or St. Petersburg. If you do consider importing, it is important to do your homework as to species, grade, etc., especially from China.

Think "outside the box" every day. Many of the old methods will become obsolete, and it is never too soon to think about the future.

If you use a consultant, find one who is not long on statistics and short on accurate conclusions. And like the general who is fighting the last war, many try to shoe-hom past trends into new ones that have a totally different dynamic.

My timeline for these events is around 2009. Even if my forecast is a month or a year off, the trend is almost inevitable. Right now too many in our industry are (understandably) not thinking past survival mode. But while you are "sweating out" moving that 4 million bd. ft. of overpriced inventory in your yard, it is also important to look ahead, as the future will be here sooner than you think.

- Mr. Krier is a 3O-year veteran of the lumber industry. Formerly president o.f Stora Enso Timber US. he is now pre.sident of JLK Global Inc. You can contact him at john@jlkglobal.com.

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