Splinters Everywhere

At a conference with President Clinton last Apr. 2, forest-products executives argued for an end to the ban on sales of timber from federal lands in the Northwest. They lost. Clinton's plan for balancing timber harvesting and the environment promises only a limited resumption in cutting, and even that proposal may get bogged down in court. "The industry is bitterly disappointed," says Richard P. Wollenberg, chairman and chief executive of Longview Fiber Co. in Longview, Wash.

For every loser, there's usually a winner, however. While companies that depend on federal logging suffer, larger competitors that control private timber are cashing in on a runup in prices caused by tighter supplies. In 1993, the average price of framing lumber rose 40%, to roughly $395 per thousand board feet, pushing wood operating profits up 57% at the 19 biggest producers, says Dean Witter Reynolds Inc. analyst Evadna Lynn. "It's been dynamite," says consultant Bob Wulf at Pope & Talbot Inc. in Portland, Ore.

TWIN PEAKS. Feast and famine will be the pattern again this year. Lumber demand will be up substantially and production may rise only 3% because of capacity constraints and the timber ban. So Lynn expects prices to surge 15%, with wood profits jumping at least 50%. But most big wood producers also make paper, and there the outlook isn't nearly so rosy. As the slow U.S. recovery and grim economies overseas depressed demand, paper prices fell for the fourth year in a row in 1993. Operating profits for the paper segments of the 19 largest companies plummeted 40%, Lynn says. At best, industry executives predict, prices and profits may recover this year to the depressed levels of 1992 as average capacity utilization surpasses the breakeven rate of 93%. "There's no question we have seen the trough, and improvement is ahead," says John B. Fery, CEO of Boise Cascade Corp. "The question is the level of the slope."

That will depend partly on overseas markets. Over the previous five years, 60% of the industry's 9.6% production hike went for export, says American Forest & Paper Assn. economist Richard Storat. But in 1993, key Scandinavian currencies weakened against the dollar and Europe's and Japan's economies dived. After years of growth, U.S. paper exports fell about 6% in 1993, says Lynn. She expects them to grow 5% in 1994 as economies abroad rebound in the second half.

Paper's prospects should be brighter at home. The most promising grades are linerboard for corrugated boxes, coated paper for magazines and catalogs, and uncoated white office paper. Linerboard prices, which hit bottom at $290 a ton in 1993, are expected to average $330 to $335 this year. Coated-paper prices may rise 1% to 2% this year, the same as last, if magazine ad pages rise. That should be the case, too, for uncoated paper, where the problem is continuing capacity additions. After rising 7% last year, newsprint prices may slide because of weak consumption and inventory drawdowns.

Pulp, meanwhile, will stay in the doldrums. Just 18 months ago, the U.S. was the low-cost producer of this raw material for papermaking. But now, the currency situation favors Scandinavia, and new capacity is planned for Indonesia and Malaysia. At $390 a ton, prices are below production costs for many companies, and analysts think an 8% increase this month won't hold.

GOOD HABIT. Amid the gloomy news, paper makers ended 1993 on one bright note: Recycling has finally caught on. Since 1988, the industry has invested $7.5 billion in equipment for making recycled paper. The goal it set in 1990--to reuse 40% of all paper consumed in the U.S. by 1995--was achieved two years early. Last year, "we recovered as much paper as went to landfills," says Storat. "By the year 2000, we will recover twice as much."

No matter which products do best in 1994, some companies are readier than ever to cash in. Westvaco, Mead, Weyerhaeuser, and others have cut costs and improved production processes, so even a slight increase in prices will boost profits. Those with big timber operations, such as Louisiana-Pacific, Potlach, and Plum Creek Timber, should benefit as housing starts rise to 1.37 million vs. 1.2 million last year.

Small, independent mills in the Northwest may not be as fortunate. Clinton's plan for resuming federal timber sales won't be complete until March, and then it may be challenged. That means no federal timber sales until midyear at the earliest. Already, about one-third of the 770 Northwestern mills that were operating in 1988 have shut down, putting 32,000 employees out of work. "For the communities affected by federal timber, the outlook is dismal," says Paul Ehinger, an industry consultant in Eugene, Ore. So again this year, pain for some forest-products producers will be another company's gain.