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Global Trends Driving the Great Lakes Region Forest Products Industry

Global Trends Driving the Great Lakes Region Forest Products Industry

Like most industries in the new global economy, the forest products industry is in a constant state of ever-hastening change. The shifting nature of the business and industry environment is constant and evolves over time. What ultimately matters is how we respond to the change going on around us, and how we adapt for success in the future.

A 2002 Harvard Business Review article titled “The Consolidation Curve” describes how businesses evolve over time, which helps to visualize the process of industry maturation. In short, there are four stages to the evolution of an industry: 1) Opening, 2) Scaling, 3) Focusing, 4) Balancing/Alliance. The authors note that, “Today, we predict, an industry will take on average 25 years to progress through all four stages; in the past it took somewhat longer, and in the future we expect it to be even quicker. But, our research suggests, every company in every industry will go through these four stages—or disappear. Thus, an understanding of where in the cycle an industry is should be the cornerstone of a company’s long-term strategic plan.”

Where does the forest products industry currently fit on this curve? Globally, the industry is likely in the late stage 2/scaling phase, but the North American industry, in particular, has settled into a mid-stage 4/balancing/alliance phase. It’s important to keep in mind that these stages are neither “good” nor “bad,” but they simply help determine where an industry is at any given time along the curve. Also, bedrock industries tend to follow this curve cyclically over many decades as technology and products change to keep up with consumer demand.

I would also note that the industry encompasses a wide variety of manufacturers that produce a huge assortment of products from forest raw materials. However, there are two primary businesses that drive the market: pulp/paper and housing. In fact, there is lots of diversity even within the pulp/paper sector itself, including packaging, coated papers, specialty papers, tissue and market pulp just to name a few.

Given where the North American industry is on the consolidation curve, we are likely to see more mergers, acquisitions and closures in the future. Production continues to be consolidated into newer, more efficient facilities while old mills have been shuttered. In just the last two years alone, we have witnessed industry giants MeadWestVaco and RockTenn merge to become WestRock, Verso purchase New Page, and a series of mill shutdowns from Maine to the US South. Most recently, Weyerhaeuser merged with Plum Creek to become the largest private timberland owner in the world with an incredibly diverse land base. There are likely more of these consolidations to come.

So what do these developments tell us about proper strategic planning and decision making? Let’s take a look at the macroeconomic drivers of the forest products industry on a global scale, in North America, and on a regional basis.

  • Population Growth will always affect the consumption of goods. Over the next 35 years, we will see accelerated population growth occurring outside of North America in areas such as India, Africa, and to a lesser extent Latin America, where the population will expand by 1.5 billion people. This rising population will also be increasingly urbanized. 

 

  • Millennial Behavior will be the primary force driving the consumption of goods, but this cohort is vastly different than the baby boomer generation. Even though the population in North America will grow by almost 80 million people, housing demand will be dampened. Millennials are starting home formation 7+ years later than their parents’ generation, and they are increasingly urban centric. Consider this statistic: Only 23% of 18 to 31 year olds are married and own a home today, compared to 56% in 1968. While most millennials want to own homes, high student loan debt and limited savings are having a negative impact on home buying abilities. 

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  • The increase in the use of digital devices is driving the consumption of certain types of paper down, decreasing the use of the printed page. We witness this trend in our daily lives with thinner magazines, fewer newspapers and less mail. There is more information available for public consumption than ever before, but the way we access it is changing dramatically. While paper is a growing industry on a global basis, most of the growth is in the Asia Pacific region where the increased use is focused on packaging and personal care products such as the tissue and towel sector. However, wood fiber consumption for mills in the northern US, shown in the chart below, is heavily focused on printing and writing papers.

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  • The softwood fiber supply squeeze is a global phenomenon that will unevenly affect mill cost structures going forward. While total softwood availability (fiber and logs) remains plentiful, the squeeze on long fiber availability will likely lead to cost position changes for many mills. European pellet demand is also a contributing factor, as US South pine consumption will increase by 20 million tons over the next ten years.

 

  • The Strength of the US Dollar is an important element that drives imports and exports. While this macroeconomic factor is beyond the control of any individual mill, company or industry, don’t underestimate how the value of the dollar drives behavior, manufacturing and the global movement of goods. 

What does all this mean for the Great Lakes region forest products industry? While housing demand certainly plays a role, the region is typically focused on the hardwood resource. In this regard, pulp and paper is a key industry for managing a healthy hardwood market. The pulp and paper industry in the Great Lakes region is focused on printing papers. Globally, however, the industry is weighted heavily towards producing packaging and tissue/towel. With demand increasing primarily outside of North America, lack of economical access to ports will negatively impact the regional industry.

The Great Lakes region does have many high-quality, modern pulp and paper mills. These mills have access to a unique hardwood resource available from a diverse land ownership that includes NIPF, large institutional lands, and government-owned lands at the county and state levels. This diverse land base is a luxury other regions simply do not have. The Great Lakes region also has relatively cheap energy availability, as well as a rail system that is active and accessible to the industry.

However, raw material costs in nearly any segment of the forest industry are a significant portion of the finished product cost. As you can see in the chart below, the Great Lakes region has high supply chain costs compared to other regions.

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Because raw materials are such a large cost component of the finished product in the industry, the supply chain must be as efficient as possible given the realities of changing global markets. From the Great Lakes region to other parts of North America—and throughout the rest of the world—the process of managing the wood and fiber supply chain is the same: grow, harvest, skid, load, haul and utilize. Devising successful methods for removing cost from the supply chain is one of the most important factors for helping the Great Lakes forest products industry remain relevant, successful and profitable in the future.

 

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