Housing, Drought Impact Housing Market

February 5, 2008; Charlotte, NC

The struggling housing market has forced mill closures and lumber production cutbacks in eastern North Carolina and Virginia, and the regional drought has driven timber prices to their lowest levels in almost a year, an expert in the forest products industry said Tuesday.

Mill production in the region was down about 13 percent in 2007 compared to 2006, and two mills north of Durham, N.C., have shut down completely, said Daniel Stuber, operations manager for industry market information provider Forest2Market. The lumber market is weakening to the point that revenues for mills are falling short of production costs.

Further complicating the market is the regional drought. The lack of rain in 2007 allowed loggers to harvest trees for longer periods of time, which caused the supply of timber to swell. As a result, mills were able to stock their inventories, and the demand for timber weakened.

“Prices for standing timber are suffering,” Stuber said. “Mills aren’t aggressively bidding for logs because their inventories are manageable after cutting production levels.”

The drought reduced the cost of raw materials for mills, but the industry is approaching a standstill if landowners begin to withhold tracts from purchasers until prices rebound. Prices are not expected to fully recover until the housing market improves.

The only bright spot for timber prices has been a healthy pulp and paper market. The decrease in lumber production has caused a shortage of wood-chips – a lumber byproduct used in pulp mills.

“The stability of the pulp and paper market has kept timber prices from falling to the basement,” Stuber said. “However, if the weakening national economy causes a decrease in pulp production, falling prices will follow.”

The forest products industry in North Carolina and Virginia employs more than 87,000 people with an annual payroll of almost $4.2 billion. The two states have a combined 26 million acres of timberland in private ownership.

Based in Charlotte, N.C., Forest2Market has developed sophisticated analytical tools to accurately forecast timber prices.