Forest Products Industry Impacted By Higher Costs

Higher raw material costs continue to hamper the forest products industry, negatively impacting earnings during the first quarter of 2007. Prices for delivered logs and chips increased during the first quarter costing paper, paperboard and solid wood manufacturers $2.4 billion, or an additional $64.7 million for virtually the same volume from the fourth quarter of 2006, according to Forest2Market, Inc. (F2M), a Charlotte-based provider of pricing data for the forest products industry.

According to F2M’s Free on Board (FOB) Delivered Pricing Benchmark service, paper and paperboard manufacturers’ raw material costs were approximately $34.80 per ton, an increase of almost $1.50 per ton from the fourth quarter of 2006. Raw material costs were affected for the most part by seasonal weather patterns during the quarter as evidenced by a 21 percent reduction in mill inventories from the fourth quarter. Cost increases, however, were partially offset by decreased mill production (measured by mill consumption). Consumption was three percent less than the prior quarter.

As for the solid wood sector, manufacturers were unsuccessful in cutting raw material costs in the wake of weakening demand for lumber and panels. Raw material costs for the solid wood sector were $52.05 per ton, an increase of $0.28 per ton from the fourth quarter of 2006. As with the paper and paperboard sector, raw material prices were affected for the most part by seasonal weather patterns. Mills, however, were disciplined in their purchases this period despite declining inventories of approximately four percent.

The outlook for the second quarter is positive for paper and paperboard manufacturers. Raw material costs were decreasing in March and will continue as seasonal weather patterns are expected to improve. Mill inventories are expected to recover as a result, allowing mills to balance supply with paper and paperboard demand. On the downside, the weakened state of the housing market will continue to put pressure on solid wood manufacturers. Raw material costs for solid wood manufacturers are also expected to benefit to some degree from improved weather patterns, but mills will be forced to reduce production in order to align solid wood demand with supply. This will have a negative affect on the supply of solid wood residuals, causing FOB price increases for residual chips to the paper and paperboard sector.     Forest2Market was founded in 2000 to bring solutions to participants in the forest and wood products supply chain. F2M provides raw material pricing data for the forest products industry that is current, local and accurate, thus allowing landowners and forest products professionals to make more informed decisions. F2M’s suite of customized market-based analytics allows both buyers and sellers to make better fact-based decisions.