The U.S. sawmill industry, for both hardwoods and softwoods, is going through some stormy waters. I will make a few comments about the softwood industry before getting to the hardwood theme of this article.
Softwood Sawmills
In spite of a heavy demand for softwood lumber, the prices have been depressed. Some Southern Yellow Pine mills have shut down because they can buy lumber for treating and remanufacturing cheaper than they can manufacture it. Prices jumped just before press time when the Department of Commerce announced its new 19.3% duty on all Canadian lumber coming into the U.S. This is retroactive back three months until mid-May. The softwood lumber industry has struggled; looking at the factors in place makes me suspect that the struggle will continue. The duty issue is not really settled; it is part of a long standing dispute over whether or not Canada subsidizes the stumpage from Crown land for its large lumber industry, particularly in Western Canada and Ontario.
In addition to pressures from the huge flow of Canadian softwoods into the U.S., there is a growing competitive threat from softwood lumber coming into the country from the south. Softwood plantations in Central and South America are starting to reach a level of maturity, and competitive material from those areas is rising. Radiata Pine from the South can be pressure treated well enough that it is competing with Southern Yellow Pine in the treated arena where SYP had reigned as king.
In the West, environmental pressures throughout the 90s caused change to be the theme. The facts include fewer mills, more small log processing, less government land being logged, and the threat of further environmental restrictions that build on the absurdity illustrated by the Spotted Owl. In spite of the many things that have impacted the western sawmill industry, U.S. lumber production in the West has continued to be fairly strong. Private land owners stepped up to the plate and provided enough timber to compensate for much of what Uncle Sam had withdrawn from the market. In the state of Oregon, a huge percentage of the total land is government owned, a problem that is fortunately not duplicated in other areas of the country.
Competition from both the North and the South seem to loom larger over time, and environmental pressures continue to intensify. A time may come when world timber supplies will again put the U.S. softwood industry in more control of its own destiny and allow more attractive margins. However, at this time the softwood sawmill industry is not happy with the circumstances. A poor turnout at this year’s major Portland and Atlanta shows supported the fact that machinery investments are under extreme fire. The Portland attendance was down about a third, and the Atlanta attendance was down over 25%.
Hardwood Sawmills
Recent editorials in the Weekly Hardwood Review market report for grade hardwood and the Appalachian Hardwood Association newsletter emphasized the plight of the hardwood sawmilling industry. Many of their comments are about the furniture industry because that is an important hardwood using industry that is in a major state of flight. The furniture industry is rapidly moving off shore, particularly to China. This is having an impact on the hardwood sawmilling industry and will continue its impact in the near future. Conversations with George Barrett and Andy Johnson of Hardwood Review and Mark Barford of the Appalachian Hardwood Association helped reinforce the statements they put into print. Some of their observations about the furniture industry and its impact on hardwoods are pretty strong, but they serve as good food for thought.
Changes have hit the hardwood industry like a tidal wave. It appears that many hardwood mill owners are taking conditions in stride as if they were typical market swings that historically have accompanied economic recessions. While it makes good sense to maintain control and avoid a panicky concern, it also makes sense to examine the facts. The two sources referenced here build a strong case to support the fact that the changes that are impacting the hardwood industry are much more than just an economic swing. I want to thank George, Andy, and Mark for lending their insights.
The largest dollar market for hardwood lumber is the furniture industry. Thus, significant changes in furniture buying habits and the location of furniture manufacturing plants are important to sawmillers. The material below is taken directly from the June 22 issue of Hardwood Review. The sidebar comes from the August Appalachian newsletter. What happens to furniture may impact the pallet industry because it will impact hardwood mills and their product mixes. Smaller hardwood mills are the most likely to be impacted by the furniture shift. Of course the pallet industry buys a lot of pallet material from this important sector of the industry.
The Hardwood Review article said — Reading the U.S. furniture industry trade journals has been rather sobering lately. At times, articles in these magazines have resembled wartime casualty reports, as companies that have been in the furniture industry for generations — Athens, Bassett, Broyhill, Century, Ethan Allen, Kimball, Lane, La-Z-Boy, Lexington, Pulaski and Universal, to name a few —have closed or are planning to close plants in the U.S. Press releases from many U.S. furniture manufacturers have been filled with words like “restructure,” “reorganize,” and “streamline” as they attempt to cut costs, restore profits and stop the bleeding. Clearly, the explosion of imported furniture has caused radical changes in the U.S. furniture industry. And, while imported furniture already accounts for over 34% of all U.S. furniture sales, we have only seen the tip of the import “iceberg,” and it won’t stop with furniture.
Several years ago, many furniture industry observers predicted that imports would take on a larger role in U.S. markets. However, few anticipated the rapidity at which these changes would take place or to what extent they would impact the industry. We can remember when most expected that imports would only be accepted at the lower end of the price scale. Most said that foreign competition could not provide the quality and service that the American consumer demanded. But the combination of a strong U.S. dollar, low foreign wages, new investment in foreign production and plants, and aggressiveness on the part of exporting countries has quickened the pace of change.
In the last six months, we estimate that 50 to 75 U.S. furniture plants have closed. According to the U.S. Department of Labor’s Bureau of Labor Statistics, there were 98 instances of mass layoffs (50+ employees) in the furniture industry from January through April 2001. In total, 10,205 jobs were lost! Foreign outsourcing and competition were the primary reasons cited by industry observers for most closures.
At the April International Home Furnishings Market in High Point, NC, imports had a huge presence in the showrooms of both domestic and overseas producers. Century, Hammary, Pulaski and several other well-known U.S. furniture companies now import more than 50% of the furniture they sell. Stanley and Richardson Brothers, which long stood apart for its reluctance to import, is now importing as well.
The growth of Chinese furniture imports has been phenomenal. In 2000, 29% of all furniture imported to the U.S. — and 8% of all furniture sold here — as manufactured in China. U.S. imports of Chinese wood furniture increased from $69 million in 1992 to $1.7 billion in 1999, a 25-fold increase. In fact, Chinese furniture imports to the U.S. have increased more than 30% per year for six straight years, including a 45% gain last year.
Still, many do not understand the threat that furniture imports have to the U.S. hardwood lumber industry. Often, we hear that “they will still have to buy lumber from us as we have the best wood,” or, “overseas lumber producers do not produce the quality that buyers want.” But, competitors around the world are improving quality. When the first Toyotas, Datsuns (Nissan), and Hondas rolled into the U.S. in the 1960s, the quality was generally poor and the Japanese automobile industry was not taken seriously. By the late 1970s, two of the big three automakers — Chrysler and Ford — were near bankruptcy due in large part to the quality and economy offered by Japanese imports.
Just a few years ago, shipments of Chinese furniture to the U.S. were also characterized as low in quality. Like Japanese automakers, however, Chinese furniture manufacturers have made vast improvements in quality. Most are operating with technology and machinery more advanced than that found in the average U.S. furniture factory. They can no longer be dismissed as low-end suppliers. In fact, several Chinese furniture plants are attempting to penetrate even high-end U.S. markets.
While China is the leading furniture producer in the Far East, plants are also being built in other Asian countries with the exception of Indonesia, where civil strife deters investment. In Vietnam, the government is aggressively seeking foreign investment capital to build furniture factories and other industrial plants. Likewise, furniture manufacturing capacity is increasing in Thailand. Labor is also plentiful in most countries, as workers willingly work 12 to 14 hours a day for less than $50 per month.
In addition to impacting the U.S. and Canadian furniture industries, far eastern exports are also overwhelming the domestic furniture industries of other developed countries, such as Japan, Germany, Spain and France. This in turn has an indirect impact on North American producers by reducing the demand for lumber, component parts, panels and veneer.
Until recently, nearly one-quarter of annual U.S. hardwood production (3.4 billion BF) was consumed by the furniture industry. As manufacturers have either reduced output or shifted production offshore, their utilization of North American hardwoods has correspondingly declined. We estimate that hardwood shipments to the domestic furniture industry have fallen by as much as 30% in the last two years. While some of this decline has resulted from the slower economy, most is directly related to increased imports of finished goods. Further, we expect that within the next two years, usage will be down another 20%. In other words, in a five-year period, domestic hardwood usage in the furniture industry may be cut in half! If this comes to pass, sellers will need to find new markets for over 1.5 billion feet of lumber.
For North American hardwood producers, some might say the answer is simple — just ship more lumber to the Far East since they are now the ones making the furniture. The fact that poor forest management and government regulations have left China, Vietnam, Thailand and Malaysia with very limited timber harvests supports this notion. However, it must also be noted that far eastern manufacturers have been purchasing more lumber and logs from Africa, South America and Eastern Europe. Furniture shipments from China have been increasing at a much faster rate than have North American lumber exports to that country, which confirms that they are sourcing a larger percentage of their hardwood lumber from other parts of the world. In addition, far eastern furniture manufactures are using more Radiata and Elliotti (slash) Pine in place of hardwoods. And if Russia further develops its infrastructure, it could emerge as a significant supplier of hardwood lumber and logs to the Far East. In the end, it is unlikely that the Asian markets will absorb the full amount of lumber previously shipped to the North American furniture industry.
Barring some unforeseen circumstances, furniture imports from the Far East will continue to increase and domestic production will continue to shrink. Within ten years, we expect that only a few domestic furniture manufactures will remain. These will likely be high-end producers who offer mass customization and rapid delivery. As Federal Express proved, American will pay a hefty premium for fast delivery. Other U.S. furniture companies will shift their production to the Far East and focus on marketing and distribution at home. However, as markets mature, retailers may increasingly source furniture directly from the foreign-based manufacturers, bypassing U.S.-based companies entirely.
While the winds of change are still swirling in the furniture industry, we are seeing early signs of a similar change in the kitchen cabinet industry. Already, many U.S. cabinet manufacturers are bringing in doors manufactured overseas while others are looking into doing so. In general, domestic kitchen cabinet plants are more efficient and modern than U.S. furniture plants, which means the cabinet importers will have more difficulty capturing U.S. market share than did furniture importers. However, it will still happen. Whether we see the same degree of changes in the cabinet industry that we have seen in the furniture industry remains to be seen. Thanks to the writers at Hardwood Review for the insights expressed above. You may call them at 704/543-4408.
