Industry Outlook 1991: NATURAL RESOURCES
FOREST PRODUCTS GO UP IN SMOKE
Terrible. Dismal. Sobering. That's how analysts and industry executives describe prospects for the $185 billion forest-products business this year. The lumber market has collapsed. Pulp prices are in a free-fall. Prices for most grades of paper are crumbling.
Profits for the industry's 29 largest companies will drop an additional 10% to 15% this year, after diving as much as 35% in 1990, predicts Saul Yaari, managing director of Piper, Jaffray, & Hopwood, an investment banking firm in Minneapolis. The worst of the hurt will fall on the solid-wood side of the business, where a year ago executives were as confident about their prospects as their counterparts in paper were worried about theirs.
The most severe housing slump since 1981 ended that optimism. Housing starts dropped from a seasonally adjusted annual rate of 1.25 million in January of 1990, to 1.12 million in November. After Iraq's August invasion of Kuwait, consumers grew so skittish that they even cut back on lumber purchases for home remodeling and repair. The weighted average price of Douglas fir lumber tumbled from $285 per thousand board feet in July to $267 in November. Demand for softwood lumber has dropped by 9% from its 1987 peak, and Weyerhaeuser Co.'s chief economist, Lynn O. Michaelis, thinks it may fall an additional 7% or 8%, to 42.5 billion board feet, in 1991. "We're likely to go through the most severe recession since World War II," says Walter C. Minnick, chief executive of TJ International, a Boise (Idaho) producer.
The financial consequences have been severe. In the third quarter of 1990, profit declines at the six biggest wood companies ranged from 41% to 78%. Even after 40 independent mills closed in the Northwest, Louisiana-Pacific, Willamette, and Weyerhaeuser had to shutter mills in late 1990. The ripple effect on the Northwest economy may rival that of 1980-82, the last time housing collapsed.
Not everyone is totally bearish. "We expect the first half to be difficult, with modest improvement in the second half," says John B. Fery, CEO of Boise Cascade Corp. But even if demand picks up, costs will be a problem. Last June's Interior Dept. decision to protect the spotted owl mandates cuts in the Northwest timber harvest, possibly even on private lands. Restricted supplies will sustain log prices, perpetuating a cost squeeze on lumber producers. Worse, "when there's a housing turnaround, there won't be a log supply to serve it," says Alberto Goetzl, chief economist for the National Forest Products Assn.
'TRUE GLUT.' The outlook for paper is only a bit brighter. Profits for the paper gperations at 23 forest-products companies fell 15% in 1990 and could drop another 15% this year, says Dean Witter Financial Services Inc. paper guru Evadna Lynn. The key culprit is a surplus of capacity, which may grow by 3.8% in 1991, says the American Paper Institute, while demand stays flat at best. As a result, paper mills' operating rates could fall below the industry breakeven point of 93% this year and next. Prices of almost all grades of paper seem likely to fall, and consolidation in the industry is likely.
Worst hit will be pulp, the raw material used to make paper. The price of northern bleached softwood kraft, the bellwether variety of pulp, has plunged from $840 a metric ton a year ago to about $725 now. Analysts think a drop to $550 is possible in 1991, because other countries are pumping pulp into a saturated world market. "It's a true glut," says Sherman Chao, a Salomon Brothers Inc. analyst.
The only bright spot is that the falloff in the price of pulp is coming after a tremendous run-up, from $380 per metric ton in late 1985 to $840 in April, 1989. "Our pulp and paper businesses are still very profitable," says Georgia-Pacific Corp. Vice-Chairman Harold L. Airington. "Pulp prices will be weak, but not disastrously weak like in the early 1980s." The price outlook for most paper grades isn't good. Linerboard, used for boxes, enjoyed an export boom last year, when domestic demand was weak. Exports may not be as robust in 1991. Newsprint prices were buoyed in 1990 by strikes in Canada. With the strikes over and six new machines starting up in North America, prices may drop from $585 per metric ton to $540 by yearend.
The tissue outlook is more promising. While prices may erode because of fierce fights for market share, such big producers as Kimberly-Clark Corp. and Scott Paper Co. could have small earnings increases as their raw material--pulp--gets cheaper. Makers of specialty papers, such as Mosinee Paper Corp. and Wausau Paper Mills Co., will do better than companies such as Champion, Boise Cascade, and Bowater, that depend heavily on commodity grades used for making such products as cardboard boxes and paper bags.
Now, as important as having the right products will be having low debt, efficient plants, and a strong overseas business. By these measures, analysts tend to favor Temple-Inland, Scott Paper, Kimberly-Clark, and International Paper. IP has diversified and moved into specialty products like nonwoven paper for medical gowns. It has spent more than $1 billion since 1988 to buy six companies in Europe, where the outlook for paper demand is better than in the U. S.
For papermakers, "the wild card is the price of the dollar," says Peter T. Pope, chairman of Pope & Talbot Inc. For now, with the greenback cheap, the U. S. is the world's low-cost pulp and paper maker. That isn't much solace, but at least it means that U. S. companies are more ready to compete than their Canadian and Scandinavian rivals.Dori Jones Yang in Seattle