Rising Lumber Prices Have Sawmills Looking for Buyers Overseas

by Nick Bjork

Daily Journal of Commerce

March 30th, 2011

According to the Oregon Department of Forestry, log prices in western Oregon have risen 60 percent since hitting a low in the second quarter of 2009.

Prices for finished lumber, however, remain cheap because of stagnant domestic demand – especially among home builders.

The combination has left sawmill officials across the western states questioning how to turn a profit. It’s a concern that’s leading them toward uncharted waters – the possibility of selling their finished products to foreign buyers.

“Foreign demand for our logs has been the 800-pound gorilla in the room for years,” said Tom Partin, president of American Forest Resource Council, an industry group that represents 80 sawmills in Oregon, Washington and Idaho. “And we are finally starting to see it take the first crunch on our closest mills to the West Coast, the ones in the Willamette Valley.”

The problem stems from an excise tax that Russia has imposed on logs leaving the country, which has turned China log buyers toward the western United States, driving up demand and prices for raw logs. But because of low demand for finished lumber, sawmills must pay higher log prices without generating a comparable increase in lumber prices.

The Boise Cascade LLC plywood mill in Medford paid 35 to 40 percent more for logs in the past eight to nine months, said John Sahlberg, the company’s general counsel and human resources vice president. But prices for plywood have remained steady. They will rise only if mills cut production in response to the high price of logs, curtailing demand, he said.

“For some of these sawmills going out and buying logs on the open market now, it’s hard for them to convert profitability,” said Shawn Church, editor of Random Lengths, a Eugene-based newsletter that publishes data on softwood lumber and panel markets.

As an example, Douglas fir logs are selling for around $650 on the Oregon Coast, up from $500 at the end of 2010. Conversely, framing lumber is selling at $291 per 1,000 board feet, down from $319 at this time last year and $301 at the beginning of 2011.

“What’s driving the North American lumber market is offshore business,” Church said. “Domestic demand is very suspect, and the housing market has not performed anywhere close to expectations for this year so far.

“At the same time, you have the Chinese and Koreans buying logs off the coast, paying premiums to the (U.S.) market. That in turn is helping to drive up domestic log prices at a time when domestic lumber demand is historically weak. It is creating a pinch for North American lumber producers.”

Further compounding the problem is that a lot of the large mill operators – like Georgia Pacific and Boise Cascade – have sold a majority of the private logging land they owned to real estate investment trusts over the past decade. This means that they no longer control where the logs go, and investors in these REITs don’t care about lumber prices because they are profiting from increased log prices.

According to Partin, mill officials are now looking for buyers in countries like China, Japan and Australia – three of the biggest importers of U.S. logs.

“It’s somewhat of a double-edged sword,” he said. “On one hand we don’t want the logs being exported to these countries. But on the other hand we have to make a case that these countries should buy our finished lumber.”

Some mills in Oregon are testing these waters. Hampton Lumber, a large company that mills in Oregon and Washington, recently purchased a Warrenton mill from Weyerhauser. Hampton will cut all of its logs into metric measurements in order to ship them overseas.

Dan Phillips, chief financial officer of Banks Lumber in Banks, said officials with the company have explored options overseas, but haven’t nailed down a definitive plan.

“We’ve been approached by the Chinese and a few other countries, but it’s not as easy as making a deal and sending lumber over,” he said. “In any deal you have concerns about how you are going to get paid, and that is only intensified when you are dealing with someone overseas.

“If something went wrong we wouldn’t even know who to sue.”

This problem is compounded by international trade politics, Phillips said. China tends to import raw materials, but isn’t willing to export them. It isn’t fair to ship products and get nothing in return, he said.

“I would love it if a log never left the U.S., but we understand that isn’t practical,” he said. “So we are turning our attention to fair free trade.

“But if we are sending over our materials, we are going to need to get materials in return.”

Editor’s note: Brad Carlson of the Idaho Business Review contributed to this story.

Pictured above: A load of Douglas fir is transported at Banks Lumber Co. in Banks on Wednesday. Prices for logs have skyrocketed lately because of foreign demand. This has left local mills in a bind because lumber prices remain low. (Photo by Sam Tenney/DJC)

Logs and lumber, by the numbers

• 60 percent: The increase in log prices in western Oregon since the second quarter of 2009, according to the Oregon Department of Forestry.
• $543: The average log price in western Oregon for Douglas fir and Western hemlock, according to the Oregon Department of Forestry.
• 1 billion: The amount of timber, in board feet, that was exported from the western states to other countries in 2010, according to the American Forest Resource Council.
• $291: The price of framing lumber per 1,000 board feet as of March 25, according to the Random Lengths Framing Lumber Composite Price.