The global forest products market grew in value by 4% in 2006 to reach a value of $296 billion. The US accounts for 14% of this, or $41 billion. The US is also a major exporter of wood and forest products.
The most lucrative segment is industrial roundwood, which generates 55% of the market volume, with sawnwood accounting for a further 20%. The US construction industry is a major consumer of sawnwood, but after several years of strong growth the number of housing starts began to fall in late 2006. This led to declining lumber prices, and increased downtime for domestic producers who had hitherto operated at almost full capacity.
The growth of China's secondary wood product industry, which includes areas such as furniture, has been dramatic in recent years. This has led to strong demand for wood raw materials, boosting exports from US players. However, the resolution in 2006 of the softwood timber dispute between the US and Canada is likely to see increased imports from Canada to the US, increasing the competitive pressures on domestic forestry and wood companies. Furthermore, the prevalence of illegal logging operations in many countries means that US and Canadian companies, which are generally considered to operate within the law, may be at a disadvantage in the international markets.
Key players in this industry tend to be large, vertically-integrated businesses. Weyerhaeuser, Universal Forest Products, and Louisiana-Pacific are industry leaders. There is a trend for companies to sell off their timberland to institutional investors such as pension funds and REITs: the sellers may be aiming to reduce indebtedness following acquisitions, while the buyers are looking to diversify their portfolio to include forest assets that have historically offered good returns. Innovation is also important for companies in this industry. It may include the development of faster-growing, straighter trees, or diversification into new areas, such as biorefineries that can generate base chemicals and fuels from forest product raw materials.
Home Starts Falling - Late 2006 saw the number of new homes being built declining from the high levels of 2004 and 2005. As residential construction accounts for about half of wood panel product consumption in the US, this led to production falling to 90% of capacity (it had been close to 100%), with consequent increased downtime at sawmills.
China - Growth in the Chinese secondary wood product sector, such as furniture manufacturing, has seen the country rapidly increasing its lumber imports, to the benefit of US exporters. In the longer term, China is developing its primary wood product sector, with the construction of more sawmills and similar processing plants. This should increase demand for imported logs, but may impact on US lumber producers.
Illegal Logging - It has been estimated that 8-10% of all wood product production globally is due to harvesting without permits, under-reporting of production to avoid taxes, logging in national parks and nature reserves, and other illicit activities. The US industry, however, has a clean record. This means that US wood product players are disadvantaged in export markets, because illegal logging tends to increase supply and lower prices, and allows those companies engaging in such practices to reduce their costs.
Softwood Lumber Dispute - Late 2006 saw a settlement of this longstanding trade dispute. The US had imposed high tariffs on Canadian softwood lumber imports, arguing that its northern neighbor subsidized its production to the detriment of the US forestry sector. The agreement finally reached includes a reduction of tariffs, conditional on prices remaining above a certain level. This will benefit US-absed wood producers going forward.
Land Ownership - Traditionally, wood companies have been vertically integrated, involved in owning large tracts of timberland, logging, and producing wood products. There is a trend for timberland to be sold to institutional investors, such as pension funds and REITs. The sellers are often carrying more debt than they would prefer, as a result of previous M&A activities, while the buyers aim to diversify their holdings to include forestry assets which have historically offered good returns.
Innovation - Forest product companies are increasing the energy efficiency of their processes in order to reduce costs and environmental impact. Going forward, they are also looking to innovate in their product lines. For example, integrated forest products biorefineries, which can produce base chemicals and fuels, such as acetic acid, ethanol, and synthetic gas. Such processes would diversify revenue streams and allow value to be created using the waste products of existing mill processes, such as pulp residues.
Divestment of Fine Papers Operations - Early in 2007, the US player Weyerhaeuser received regulatory approval for its proposed $3.3 billion merger with Canadian paper company Domtar. When the deal is completed, Weyerhaeuser will be able to divest its poorly performing fine papers business, which will then operate under the Domtar name. In recent years, several major forest products companies have also disposed of their fine papers divisions.
The forest products market consists of chips and particles, sawnwood, wood fuel, wood residues, industrial roundwood and wood-based panels, but excludes paper and pulp. The markets value has been calculated at manufacturers selling price.