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The Importance of Oregon’s Forests in US and International Markets: Meeting the Needs of Future Consumers of Forest Products and Environmental Services
Author: John Perez-Garcia
The consequences of decisions regarding the management of forest resources in Oregon are local, national and international. This is to say that unilateral policies implemented to achieve an objective associated with Oregonian forest management programs will have unintended consequences elsewhere. This study examines the unintended consequences that arise from a simulated policy to maintain Oregon’s harvest levels constant over the next 4 decades.
Forest economies other than Oregon and their associated environments are affected by our local choices. With a projected increase in the demand for wood products, what does it mean for Oregon to constrain its participation by restraining timber harvest? This study projects a future scenario for the global forest sector with and without Oregon’s increased participation to describe the impact the Oregon forest sector has on national and international markets. It also discusses several potential impacts on the environment associated with the changes in wood flows. This study addresses the following questions: What does a reduction in Oregon’s timber output mean for forest products markets locally, across the US and internationally? Which regions pick up the market share vacated by Oregon? What tradeoffs exist between timber production and the environment? What is Oregon’s role in providing forest products, environmental protection, social and economic benefits into the future for its citizens and the global community?
To estimate the effect of Oregon’s annual harvest level on US and foreign markets, we first analyze the future demand for wood products to 2040, and identify the producers of wood products that meet this demand. We next constrain the annual harvest level in Oregon to be constant throughout the projection period (2000 to 2040), and note the changes in harvest volumes in markets outside of Oregon. Once recorded, environmental measures for the areas that increase harvest activities are examined. We also note the potential social and economic benefits associated with changes in market shares.
An estimate of future global demand for wood fiber is based on annual projections of gross domestic product (GDP) of 3.5% and two historical trends in consumption of wood fiber. Consumption is estimated to reach between 2.0 and 2.8 billion cubic meters (Bm3) over the next 5 decades, adding from 0.5 to 1.3 Bm3 by the end of the 50-year period.
Many regions participate in meeting this growing demand for wood products, including Oregon, in this business-as-usual scenario. Focusing on softwood saw logs, the South contributes over 100 million cubic meters (MMm3) or 17.7 billion board feet (BBF) followed by Canada (40 MMm3 or 7.1 BBF) and the US West (including Oregon) (10 MMm3 or 1.8 BBF). This study estimates that the southern states will meet more than half of the projected demand growth.
When Oregon’s annual harvest levels are maintained constant—i.e. harvest levels are not allowed to expand to meet the projected demand growth—two effects occur in the market. The first effect is an increase in timber prices. This is followed by responses from other regions and alternative material producers to increase production. The South captures 43% of the decline in Oregon’s annual harvest levels. Alternative material producers—i.e. lost wood demand—capture 32% of the lost market. They are followed by Asia and Canada, which capture 15% and 10% respectively of the projected demand growth without an increase in Oregon’s annual harvest levels.
These results suggest there are several competing regions with the capacity to increase harvest volumes that an Oregonian forest manager must contend with including southern states, Canada and countries outside of the US with established plantations. Recent data on import trends confirm increased market activity from several countries with expanding forest resources. Latin America, as a region, has increased its exports of softwood lumber and plywood to western ports from less than $10 million in 1990 to over $100 million in 2002 for softwood lumber and from nearly no activity in 1997 to over $8 million in softwood plywood (mostly from Chile). While Brazil’s share appears to have peaked in 1999 at less than $25 million (mostly lumber), other countries have increased exports to western ports including Chile (both lumber and plywood), Uruguay (lumber) and Argentina (plywood). Softwood lumber entering western ports from Australia and New Zealand has increased from negligible numbers in 1990 to nearly $150 million in 2002. Imports of softwood plywood from New Zealand topped $1 million in 2002. These trade flows are small but significant since they signal new market suppliers to the US through western ports that directly compete with Oregonian products.
Within the southern states, annual harvest levels are projected to increase over the next twenty years in those states outlying the traditional timber-producing central states of Georgia and Alabama. Fringe regions in eastern Texas and the Carolinas are expected to increase annual harvest volumes by 15% or more in some areas more than offsetting declines in Georgia, Alabama and Mississippi.
We examine several environmental measures for those regions expected to increase market share due to constant annual harvest levels in Oregon. In general, since regions that compensate for Oregon’s lower harvest volume have shorter rotations and lower volumes per acre at harvest time, there will be more acres disturbed by harvest activities than would have been if the harvest activity were to occur in Oregon. Conservation concerns in the South are growing as they continue to augment their share of the US market. They include a decline in ecosystem communities that are endangered and not under public management. Also, with much wood growing in emerging plantation regions around the world, and their rankings in biodiversity and other indices low, there is concern that the shift to Asian and Latin American producers may lead to lower conservation efforts abroad. Carbon dioxide and other green house gas emissions also increase with greater use of alternative materials like steel and concrete. Estimates place the additional emissions as high as 1.4 million metric tons annually by 2040.
A loss in future market share also has implications for investment strategies in Oregon, with its social and economic consequences. One conclusion of the analysis suggests that the South, with continued growing demand for wood fiber, will increase its management intensity of forests augmenting productivity. Without the larger market for Oregon producers such management investments become more questionable in Oregon with a concomitant effect on its own forest productivity. While prices for timber may go up, the revenues that landowners receive maybe reduced since they are not able to harvest the same volumes as before. In addition, the lower harvest level removes any incentive for new capacity expansion in Oregon, amounting to 7 to 8 average-sized mills. There are also extensive areas of plantations internationally. These areas are likely to come into play in the near future representing low-cost sources of wood and attracting investments to produce wood products for a globalized market.
These results suggest that planners need to evaluate the tradeoffs associated with an unexpected change in harvest levels for Oregon. Since there is a need to meet growing demand and Oregon can increase its annual harvest level to meet a part of the growth in demand, any program that limits its potential to supply wood products will allow other regions and countries to expand their harvest levels, with an associated environmental tradeoff and shift in social and economic benefits. The question becomes whether the tradeoffs are favorable for Oregon and the global community or not. These tradeoffs need to be considered in order to reach environmental, social and economic goals, which may extend outside of Oregon’s boundaries. This study, combined with others that detail Oregon’s environmental management, should prove useful in answering that question.
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Factors that Influenced the Export Success of Forest Products Companies in the Pacific Northwest during the 1997-1998 Japanese Economic Downturn
Authors: Kyle Cunningham and Ivan Eastin
Japanese housing starts reached a high of 1.64 million in 1996 as homeowners rushed to beat the consumption tax increase scheduled for 1997. The Asian economic downturn and various other factors caused housing starts to fall to 1.2 million in 1998. The decline in housing starts, in conjunction with a Japanese recession, contributed to a dramatic decrease in imports of wooden building materials. Japan, the most important export destination for PNW solid wood products, accounts for almost 31% of PNW exports. During the economic downturn, Japanese imports of PNW primary wood products fell 30%, to $670 million in 1998 while exports of secondary wood products fell 36%, to less than $100 million.
Events that occurred before and during the recession have caused structural changes in the flow of wood products to Japan. During the downturn, the Japanese yen weakened against the US and Canadian dollar, effectively raising the price of US wood products in Japan. The consumption tax rate increase, strong US dollar, and the extended economic recession combined to heighten price sensitivity among Japanese consumers. These factors combined to reduce the competitiveness of US wood products in the Japanese market.
The majority of firms engaged in exporting wooden building materials to Japan were affected by the Japanese recession. While most firms reported a decline in export revenues from Japan, some firms experienced increases in their exports to Japan. This anomaly prompted an investigation into why some firms were successful in increasing their exports while other firms were not. The objectives of this study were to document the perceptions of PNW exporters and manufacturers on the importance of services offered to Japanese customer, to discover the key characteristics of successful exporters and to identify the impact of the marketing mix on export performance. A mail and fax survey was designed to elicit specific information on the demographic and operational characteristics of exporting firms in the Pacific Northwest.
The survey population included firms that exported or manufactured and exported wooden building materials to Japan. The survey was administered by fax with follow up faxes and letters. Of the 163 US and 71 Canadian firms, 44 US (27%) and 15 Canadian (21%) firms were judged to have gone out of business. Out of 173 viable firms, 72 returned completed surveys for a response rate of 41.6%. US firms returned 41 surveys from a population of 119 for a return rate of 34.5%; while 31 of the 54 Canadian firms returned surveys for a response rate of 57.4%.
An open-ended question prompted the respondents to identify the factor that had the greatest impact (positive or negative) on their business in Japan. The most frequently mentioned factors were the Japanese recession and the strong US dollar, while marketing factors, such as distribution and services were mentioned less frequently.
The survey data suggests that shorter channels were used more often than the traditional Japanese multi-layered channel. On average, 58% of the respondents export sales went directly to Japanese homebuilders, while an additional 7% went through a company sales office. Other distribution channels included Japanese distributors, Japanese wholesalers and other trade intermediaries. Respondents perceived a significant advantage to having a sales office and sales/technical representatives in Japan. They also perceived a significant advantage to using a Japanese distributor to take control of product distribution. Overall, the survey data suggests that distribution channels for wooden building materials to Japan are becoming shorter.
Softwood lumber was the most commonly exported product (22%), followed by wooden doors (17%) and wooden windows (16%). The remaining products exported included prefabricated housing components (10%), structural panels (8%), cabinets (8%), and glulam beams (3%), while other products accounted for 16% of the export mix.
Survey respondents were asked several questions related to the importance of the offering specific services to their Japanese customers. In general, the importance of providing these services was perceived to be significantly more important by the firms that provide them relative to the firms that do not provide them. The services included in the survey were: warehousing spare parts in Japan, offering a product warranty, providing translated product information, providing translated installation instructions and providing translated maintenance instructions. Of 68 respondents, 53% reported that they provided translated product information, 46% provided translated installation instructions, and 36% supply translated maintenance instructions. An analysis of the data suggests that as the product becomes more technically complex, there is a lower likelihood that the exporter will provide translated technical information.
Nearly all of the survey respondents reported that their Japanese customers had become more price sensitive. Most firms reported that this increased price sensitivity had a negative impact on their export performance. However, a small set of respondents indicated that their exports to Japan increased despite the increased price sensitivity of their Japanese customers.
A comparison of US and Canadian firms revealed some basic differences in the products and distribution channels used to service the Japanese market. Canadian firms shipped 71% of their total exports to Japan, while the US only shipped 53%, a significant difference. Canadian firms also tended to ship a larger volume of primary wood products through shorter channels than their US counterparts. US firms were more likely to ship value-added products through longer distribution channels. Finally, Canadian firms were more likely to know the segment of the residential construction industry in which their products were used.
The distribution channel and product mix of firms that successfully exported to Japan during the Asian downturn differs greatly from the unsuccessful exporters. The firms that did well had export product mixes containing high amounts of wooden prefabricated building components and other value added products. Unsuccessful exporters tended to focus more on lumber, structural panels and doors. Successful exporters tended to report a higher use of short distribution channels, often exporting directly to the homebuilder or to a company sales office. Finally, successful exporters tended to supply a higher percentage of their products to post and beam builders and into other (non 2x4) segments of the construction industry.
Market knowledge appeared to play a vital role in export success as unsuccessful firms were over three times more likely not to know how their products were used. This lack of market knowledge makes offering after market sales support difficult and successful promotion within those market segments almost impossible. This research suggests that the firms that were successful during the downturn exported more than twice the amount of products into other market segments (primarily post & beam, prefabricated homes and log homes) than did unsuccessful firms. These segments of the housing market may be less sensitive to changes in the overall economic conditions than are the larger post and beam and 2x4 housing segments.
Analysis of total sales by export success reveals some interesting patterns. The medium-sized firms (export sales revenues between $1 million and $5 million) appear to have done much better than both small firms (export sales revenues less than $1 million) and large firms (export sales revenues above $5 million) (Figure 5.5.7). It is interesting to note that a much higher percentage of the medium-sized firms reported an increase in export revenues. Fully two-thirds of the companies who reported an increase in export revenues were medium-sized firms. In contrast, the firms who reported a decline in export revenues were fairly evenly distributed, although almost forty percent of these firms were large firms while just 13% of the successful firms were large companies. As mentioned previously, exports tend to be a much higher percentage of the total sales revenue of the small- and medium-sized firms in contrast to the larger firms who tend to have a heavy focus on the domestic market with exports rarely comprising more than 10% of their total sales. Thus, we might conclude that the medium-sized firms are more committed to the export market and have developed a marketing strategy that provides them with a greater chance of succeeding in Japan even when the markets are poor. While smaller firms are also more focused on their export markets it would appear that they do not have the financial and marketing resources to withstand a significant decline in the export market, as indicated by the fact that 83.3% of the small firms reported declines in export sales revenues in Japan.
A factor analysis reduced the larger number of eleven marketing factors into just three factors. The average importance ratings for each factor clearly show that not all of the factors were perceived to be equally important in marketing wood products in Japan. The factor with the highest average importance rating was “Providing translated product information to Japanese customers” which received an average importance rating of 5.52. The second factor, “Providing customized in-country services”, was considered to be somewhat important with an average importance rating of 3.94. The third factor related to the use of specific distribution strategies in Japan, was perceived to be the least important of the three factors with an average importance rating of 3.42.
This study has documented structural changes in the trade of PNW wooden building materials with Japan. It has also provided quantitative and qualitative insights into the impacts of the Asian downturn on the performance of exporters in the PNW. The Asian downturn may have served to accelerate the changes occurring in the distribution channels, product mix, and services offered to the Japanese housing market. Changes in the demands of the Japanese consumers have opened new areas and created new opportunities for firms to develop or increase their competitiveness. These changes include shortening the distribution channel and shifting the export mix to include more value-added products. Also, providing more after-sales support, primarily translated product information was also perceived to be important. While some of these strategies may not be suitable for all firms, exporters should realize the need for increasing their competitiveness in the expanding global economy.
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Authors: Bruce Lippke, Rose Braden, Scott Marshall
The Pacific Northwest (PNW) forest sector is strategically linked to Pacific Rim markets, as it has been at a competitive disadvantage with the US South and interior Canada in delivering wood products to the population dense eastern and southern US markets. Deep-water port access to Asia however, has provided the PNW with a comparative advantage in serving what was until recently, the region with the world's highest sustained growth. The Asian financial crisis, which began in 1997, substantially reduced US exports to Asia, and has compounded the negative impacts of the harvest restrictions intended to protect the habitat of endangered species, which began in 1990. Both the Asian financial crisis and the harvest constraints are forcing long-term structural changes. Understanding these changes is important to maintaining the economic and biological health of the forest sector.
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Authors: Ivan L. Eastin, Steven R. Shook and Wendy Sammarco
Currently, less than one percent of the private and industrial timberlands in the Pacific Northwest (PNW) are managed for hardwood production. In order to provide an incentive to manage the hardwood resource actively, hardwood stumpage prices must be consistently competitive with conifer stumpage prices, although this has generally not been the case in the PNW. A variety of factors could contribute to hardwoods being more actively promoted in the timberland manager’s portfolio. For example, species diversity provides stability in a cyclical market, improves soil fertility, and promotes biodiversity in forest stands.
The hardwood industry in the PNW, largely red alder, has experienced surprising success over the past decade in both domestic and international markets. This success is of interest considering that commercial hardwood species in the PNW have traditionally been considered a low value by-product of the softwood inventory. While PNW hardwoods have enjoyed increased market acceptance, little market research has been done to characterize the hardwood industry or identify the factors that have contributed to its success. The objectives of this research were to: 1) explore the competitive conditions of the hardwood industry, 2) identify the range of products currently manufactured from hardwoods, 3) analyze current hardwood markets (domestic and international), 4) identify the factors that are perceived to restrict the growth of the hardwood industry in the PNW, and 5) assess future market and product opportunities for PNW hardwood products.
Since the number of firms involved in hardwood lumber production in the PNW is relatively small (less than 15), a census of the hardwood industry was conducted. The PNW region, for the purpose of this research, consists of western Washington, western Oregon, and northern California. The survey was administered via fax to each firm in the sample frame. Thirteen hardwood manufacturers were contacted. Of the firms contacted, 10 completed and returned the survey, an effective response rate of 76.9%.
ResultsThe PNW hardwood lumber industry directly employs approximately 2,000 workers. Collectively, the hardwood lumber manufacturers surveyed in this study produced approximately 450 mmbf of lumber, with exports totaling approximately 126 mmbf or 28% of total production. The range of products manufactured included kiln dried and green lumber, pallet stock, veneer, plywood, agricultural boxes and crates, and chips. Hardwood chips represent the primary by-product and all of the chips produced are sold to pulp and paper manufacturers. Approximately half of the slabs and sawdust generated are sold (as chips and mulch, respectively) with the remainder being burned as hog fuel. Similarly, approximately one-third of the planer shavings and bark are sold for livestock bedding and landscaping bark, respectively, with the remainder being burned as hog fuel.
While both large and small hardwood lumber manufacturers sell a substantial percentage of their production direct to the end-user, large manufacturers tend to rely on wholesalers to the exclusion of brokers. In the case of small manufacturers, the opposite is true and they tend to favor brokers while minimizing their use of wholesalers.
Problems and Threats to the Hardwood Industry: The problems confronting manufacturers in the hardwood industry were categorized into three areas: domestic regulatory issues, domestic resource issues, and international regulatory issues. Survey respondents were asked to indicate the impact of each factor on
the competitiveness of their firm. Respondents utilized a seven-point scale ranging from a value of 1 (Strong Negative Impact) to 7 (Strong Positive Impact).
Domestic Regulatory Factors: The range of domestic regulatory factors identified in the survey included: federal harvest regulations, state forest practice regulations, and state taxes. Survey respondents indicated that all three domestic regulatory factors had a negative impact on the competitiveness of their firms. The mean scores for the three factors (state taxes, federal regulations, and state forest practice regulations) were 2.6, 2.8, and 2.9, respectively.
Domestic Resource Factors: The specific hardwood resource factors examined in the survey included rising raw material prices, rapid price fluctuations (i.e., price volatility), labor quality, resource availability, and resource quality. Rapid price fluctuations and increasing raw material prices were perceived as having the most negative impact on competitiveness, receiving an average score of 2.8 and 3.1 respectively.
Quality of labor (4.1) and resource quality (4.3) were each generally perceived to have relatively little impact on the overall competitiveness of the respondents’ firms. It is interesting to note that resource availability, with a mean score of 4.6, had a slightly positive impact on overall competitiveness.
International Regulatory Factors: The international regulatory factors included in the survey were: regional trade agreements, tariff barriers, non-tariff barriers, and sustainable forest certification. The survey results suggest that environmental certification of wood products (3.4) and tariff barriers (3.4) were perceived to have a more negative impact on the competitiveness of hardwood manufacturers than were non-tariff barriers (3.6) and regional trade agreements (3.7), although the difference in score was small.
Further analysis of the survey data showed that hardwood firms exporting to Europe perceived environmental certification as having a more adverse effect on their competitiveness than did firms exporting to Asia and North America.
Marketing Variables: Survey respondents were asked to evaluate the importance of each variable to the competitiveness of their firm using a seven-point scale ranging from 1 (Not Important) to 7 (Very Important). The importance ratings for the individual marketing variables indicate that a firm’s reputation within the hardwood industry was identified as the single most important marketing variable, receiving a mean score of 6.7. Communicating regularly with customers, product quality control, and providing on time delivery all received relatively high mean scores of 6.3, suggesting that these variables are also very important. Efficient operation of production facilities, with a mean score of 6.1, and procuring raw material, with a mean score of 5.7, were also perceived to be highly important.
It is interesting to note that virtually all of the marketing variables associated with innovation received relatively low importance ratings from survey respondents: developing new products (3.9), manufacturing specialty products (3.9), utilizing new marketing techniques (3.8), conducting market research (3.0), and performing promotional and advertising activities (2.5). Only a single marketing variable associated with innovation, product branding (5.2), was viewed as being relatively important. However, given the low level of importance attached to promotional activities, it remains problematic on how a company might successfully brand its products.
ConclusionsThe hardwood industry has experienced substantial and solid growth over the past ten years despite the timber regulations that have restricted the harvest levels from federal and state forests. This growth has occurred in both the domestic US market as well as in foreign markets which now account for almost 28% of red alder production. While survey respondents did not feel that harvest restrictions had adversely impacted their industry, riparian zone regulations related to endangered salmon populations could have a severe impact on the hardwood resource, particularly if those regulations are vigorously applied to private forests.
Respondents indicated that virtually none of the regulatory factors evaluated in the survey were viewed in a positive light, although few were perceived to have a strongly negative impact on the industry. Despite this, a variety of factors were perceived by respondents to have had a moderately negative impact on the hardwood industry. These factors included: state taxes, federal harvest restrictions, state forest practice regulations, hardwood log price volatility, and hardwood log price increases. It is interesting to note that
while federal and state harvest restrictions were perceived to have a moderately negative impact on the industry, respondents indicated that resource availability has not yet had an adverse impact on the hardwood industry.
Respondents indicated that those marketing variables that influenced a firm’s reputation and production efficiency were the most important in terms of positively impacting the firm’s performance. In contrast, virtually all of the marketing variables associated with acquiring market information and promoting innovation were perceived to have a negative impact on the firm’s performance. In general, these results seem to suggest that hardwood companies in the PNW are conservative and tend to place a low value on the marketing activities associated with innovation and product differentiation.
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Authors: Rosemarie Braden, Hal Fossum, Ivan Eastin, John Dirks and Eini Lowell
Interest in manufacturing clusters has increased since the recognition that inter-firm cooperation has helped develop internationally competitive industries in several European countries. Manufacturing clusters, defined as groups of firms located within a defined geographic region that have developed cooperative links with each other, have been established successfully in industries ranging from textiles to robotics.
Manufacturing clusters can provide a region with the basis for economic diversification and competitive advantage even when that region at first glance might not appear competitive in a specific industry. The emergence of manufacturing clusters is not restricted to urban areas or technology-based industries. In fact, manufacturing clusters can provide a substantially greater contribution to the economic development of rural areas than urban areas.
Several rural value-added wood products manufacturing clusters have been identified in the Pacific Northwest, including the log home industry in western Montana, to moulding and millwork industry in Bend, Oregon, and the wooden boat building industry in Port Townsend on the Olympic Peninsula of Washington. These examples provide evidence that manufacturing clusters represent an opportunity to promote the economic development of rural areas in the Pacific Northwest. Rural locales, many of which are characterized by a high dependence on timber resources, have perhaps suffered the greatest economic hardship as a result of public policies that have slashed the volume of timber harvested from state and forests.
To date there appears to be little empirical research that assesses the emergence and development of value-added wood products manufacturing clusters. This project was designed to develop insights into factors that help clusters form and survive (i.e., geographic location, proximity to raw materials, availability of other resources, industry specialization, firm-specific competencies, and the availability of support services). The specific objectives of this project were to: identify clusters of value-added wood products manufacturers in the Pacific Northwest, develop a spatial map of these clusters based on their geographic location, identify factors that contribute to cluster development, determine how specific factors impact the development of a cluster, identify value-added services (i.e., marketing expertise, product design, or manufacturing technology) that support to manufacturing clusters, and provide a set of suggestions to assist local economic development groups to identify local clusters and assess their competitive advantages.
To better understand how rural manufacturing clusters originate and survive economic cycles and resource supply changes, three wood-based manufacturing clusters in three rural communities were examined. Local business people and industry experts were interviewed in order to assess: how each cluster originated, why each cluster was located in a particular location, what role government and industry associations played in the development of the cluster, and how the cluster survives in light of market fluctuations and supply changes. Opinions regarding interaction between firms and associations, the role of government, and recipes for individual firm success varied widely; however, many common elements were repeated during interviews.
While the manufacturing clusters presented in this report became established under different circumstances, each encountered common factors that were crucial to their success. An important point to consider is that these clusters did not develop overnight. Each existed for several years with a few small businesses earning moderate profits. As more individuals moved to the area, a cluster of businesses began to form. With the exception of the moulding and millwork industry in Bend, Oregon, the communities examined did not systematically set out to create an industry and the company founders do not appear to have been motivated by the prospect of making large profits.
The first common element observed between clusters was proximity and easy access to regional markets. The moulding and millwork industry in Bend, Oregon, originated as a group of mills located near railroad lines. The Bitterroot Valley in western Montana is not only located along interstate highways, but also in a region where log homes are a fashionable form of housing. Finally, Port Townsend’s maritime industry capitalized on its proximity to Seattle, an established boating community, and the boating traffic that cruises among the San Juan Islands and the Straits of Juan de Fuca.
A second common element in firms’ decisions to locate in their respective locations was the plentiful supply of raw materials and potential customers. While respondents commented that resources were plentiful when their respective clusters emerged, they all emphasized that there is now a shortage of available timber. Firms are forced to obtain materials from other regions or to develop other technologies for using the available resource. For example, the moulding and millwork industry incorporates medium density fiberboard, finger-jointed lumber, and veneer-overlaid lumber into the products it produces. Respondents also reported spending more time locating suppliers that can supply them with raw materials.
Third, skilled labor has been critical to the formation and survival of manufacturing clusters. In the cases of Bend and the Bitterroot Valley, skilled workers already resided in the area, employed either as loggers or sawmill workers. Port Townsend, a long-time port, had a mix of individuals employed in both the maritime and timber industries. The concentrated group of firms and the community’s internationally renowned boat building school continue to draw of skilled workers to the area, which in turn helps the cluster thrive.
Each cluster originated with a few firms led by energetic owners. While, these individuals did not set out to create a cluster of similar businesses, they did recognize the advantages of having related companies locate in the same area. They were also generally civic minded and open to working with other firms, either through joint marketing, sourcing materials from neighboring firms, or referring customers to other businesses in the area. For example, the Port Townsend and the Bitterroot Valley clusters started with a few individuals who enjoyed living in their respective area and were looking for a way to earn a living. Because these communities were small, people knew each other socially and in the business arena, and recognized that it was in their best interest to work together. In Port Townsend, business owners worked together to gain city government support and draw more businesses and workers to the area. In the Bitterroot Valley, cooperation took the form of purchasing specially milled logs from neighboring firms and exchanging workers in times of boom and bust among firms. The business environment in all three clusters extends beyond depending upon each other for survival. While businesses are still in competition, it was reported that there is an open exchange of advice, referrals between businesses, and at times, equipment is even loaned. As more companies move to the area, the cluster benefits from its reputation as a regional center for a specific product or service.
Another key component in the emergence of these clusters appears to be low levels of competition initially. Each cluster was the first in their respective region to provide their particular good or service. An important point to note is that as the cluster grows, new businesses identify unique niches with either a slightly different product or an entirely new product that complements existing products. While there is some overlap in product offering between firms, it appears that business owners attempt to compete with each other by offering unique products and services. For example, the major log home builders in the Bitterroot Valley specialize in different construction style or log type. For example, one company specializes in large-diameter logs which no other firm in the area uses and concentrates on building high-end log homes or lodges. Another company has developed a planer that enables its workers to process long logs. Other businesses in the area specialize in hand-hewn logs.
Respondents in Port Townsend and Bend also indicate that innovation is vital to the success of their clusters. Port Townsend business owners report that spin-off ventures by former employees are not uncommon. It is rare that these new firms are direct competitors of the original company. Rather, the new entrepreneur often identifies a product or service that does not exist. Similarly, innovation in the millwork industry maintain a comparative advantage by developing innovative products such as finger-jointed door jambs that utilize lumber manufactured from small diameter logs.
Each cluster’s relatively small size and relationships within the local business community help it adapt to industry changes. Employees working in local businesses are more adept at identifying an industry need and creating a business to fill that need. Spin-off ventures appear to be important to a cluster’s ability to adapt to market fluctuations and regulatory changes. Owners of fledgling businesses in each of these clusters have identified gaps or shortcomings in the industry and work to supply the industry with missing products or services. For example,
Edensaw Woods in Port Townsend supplies regional boat builders and woodworkers with hard-to-find, high-quality or exotic wood and veneer. As changes in fishing regulations required commercial fishermen to fish off-shore, other companies that build refrigeration systems or lengthen boats emerged. Similarly, there are several small businesses located in the Bitterroot Valley that specialize in supplying complementary products to the log home industry, such as furniture and cabinets.
Unlike the boat building and log home clusters, the millwork industry was developed and nurtured by government. Local government developed the business infrastructure and promoted the millwork industry. While the boat building industry in the Port Townsend cluster originated independently of local government assistance, it now receives below market-value rental space at the Port, community education programs in marine trades, and the town’s Economic Development Council offers business advice and works to draw visitors to the area. The log home industry appears to be the most self-sufficient of the clusters with member firms reporting little government assistance.
While government may have helped the clusters in some respects, respondents were quick to point out instances of government interference which they feel restricts their operations. The boat building industry maintains an ongoing debate with local government over issues such as pollution cleanup and abatement costs, potential funding for a large vessel crane, and what industry views as city government’s promotion of the tourist industry at the expense of the maritime trade. Business owners both in Port Townsend and Montana reported that the costs imposed by the state for workman’s compensation are excessively high and represent an industry impediment. Respondents in all industries note that federal and state timber harvest restrictions adversely impact their competitiveness.
Industry associations, on the other hand, tend to be viewed more positively, possibly because of the voluntary nature of membership. Associations help establish and maintain contacts within the industry and lobby for the industries at state and federal levels. The Marine Trades Association organizes an annual boat show and makes booths available only to members. Other associations have helped set industry standards and promote their members' products both nationally and internationally. Cluster members also appear to benefit from nonmembership organizations. Port Townsend’s business owners benefit from the independently-run, non-profit Wooden Boat Foundation, which promotes the area’s industry through an annual Wooden Boat Festival. Members of Montana’s log home industry reported that they receive free advertising from log home magazines that often feature their homes in their articles.
The results of this exploratory project indicate that manufacturing clusters have been important to the economic development of rural communities in the PNW. Further, a range of factors that have helped in the development of local manufacturing clusters were identified and discussed. This information should prove helpful in providing economic development groups in rural timber-dependent communities with a framework for identifying and assessing the potential of promoting the development of manufacturing clusters in other rural areas. In addition, this research should be useful in helping public policymakers interested in promoting the economic development of rural communities adversely impacted by timber harvest restricted by providing guidance in identifying communities where economic and development assistance have the greatest chance of supporting the development of a competitive industry cluster.
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The Japanese Market for softwood Sawnwood and Changing Pacific Rim Wood Supply Conditions: Implications for US Pacific Northwest Producers
Authors: Guy Robertson and Thomas R. Waggener
Japan has long been Asia's largest importer of softwood sawlogs and lumber and is the major destination for U.S- Pacific Northwest wood product exports. In the period lasting from 1980 to 1993, 3apan imported an annual average of 15.2 million CUM of softwood sawlogs and 5.4 million CUM of softwood lumber. The country's major softwood suppliers are the Pacific Northwest states of the U.S., British Columbia in Canada, and the Russian Far East and Siberia. In recent years, New Zealand and Chile have also supplied increasing volumes of softwood products to Japan, mostly in the form of Radiata pine flowing from these countries' expanding conifer plantations. Recent changes in the supply structure within Japan's foreign supplier countries promise to significantly 'impact the Japanese softwood market In particular, reductions in North American harvests related to conservation and a general depletion of old-growth stock will increasingly limit the availability of high quality Douglas fir and Western hemlock sawlogs and lumber, products which have long been the mainstay of Japan's softwood import market. Similarly, moves to restrict exports of raw logs from North America, Southeast Asia and elsewhere have increasingly threatened the supply of both softwood sawlogs and hardwood peelers to Japan's lumber and plywood mills. At the same time, growing quantities of lower quality Radiata pine from New Zealand and Chile, as well as potential increases in medium quality Russian spruce and larch, will likely be available to the Japanese in the near future. While no shortage of softwoods is predicted, higher quality softwood products are expected to be increasingly scarce.
The Japanese softwood market is, in reality, a highly differentiated market where different species and grades of softwood meet specific end market requirements. Prices for different softwood products vary greatly, and substitution between sources and types of wood is often restricted. Japan has long paid significant price premiums for old-growth and higher quality second-growth Douglas fir and Western hemlock products. In view of impending supply restrictions for high quality softwoods, these premiums. can be expected to persist Firms wishing to take advantage of these premiums, either through forest management practices designed to increase quality, or through the export of processed lumber, need to consider not only the nature of their targeted market, but also the strengths and weaknesses of potential competitors. if national concerns over log exports results in a reduction of softwood roundwood exports, it cannot automatically be assumed that standard U.S. grades of commodity lumber can replace or substitute for the decrease. Rather, a more complete understanding of specific Japanese market requirements is needed to best exploit the comparative advantage of higher valued North American wood products.
Japanese Housing Market
The bulk of Japanese softwood swag and lumber imports is used in residential housing construction. Due to demographic factors, increasing income, and a comparatively rapid turnover in housing stock, Japan has one of the highest residential construction rates in the world both in gross and in per capita terms. Over the last decade, new housing starts in Japan have averaged over 1.4 million units per year. Predictions for 2000-2010 likewise foresee a level of around 1.3 million units per year. while in the two decades leading up to 1980 the share of non-wooden housing starts prim ferro-concrete multiple unit dwellings) increased substantially, shares of wood and non-wood starts have stabilized over the last decade with each commanding approximately half of the total market for housing units. This combined with predictions of stable overall demand for housing leads to the expectation of continued strong Japanese demand for softwood lumber.
Wooden housing styles and construction techniques in Japan can be divided into two general categories: traditional post and beam" housing, and Western "2x49' platform housing as well as related prefabricated construction techniques. Traditional post & beam housing currently accounts for over 85 percent of Japan's wood housing market. Since this construction style features a great deal of exposed wood particularly the posts and beams which constitute the major structural elements of the house), aesthetic as well as structural lumber characteristics are extremely important Pacific Northwest Douglas fir and Western hemlock have been used extensively in Japanese traditional housing construction, and it is this market, more than any other, which has supported the price premiums enjoyed by North American timber exporters in the past.
Since its introduction to Japan in 1974, Western style 2x4 housing construction has made steady gains. At approximately 56 thousand units in 1993, 2x4 housing now commands 8 percent of Japan's total wood housing market In addition to its cost advantage over traditional methods, 2x4 housing has enjoyed. substantial promotion from North American governments, industrial associations and other organizations. Though the market penetration of 2x4 housing has been less than originally hoped for by its promoters, its progress has been consistent, and continued increases in market share should be expected. As North American suppliers have virtually monopolized the supply of dimension lumber to this market, benefits of the expansion of 2x4 housing in Japan to U.S. Pacific Northwest producers have been immediate. There is, however, no reason to believe that other producers will not begin to supply this market in the medium-term, North American suppliers to the 2x4 market can expect to face increasing competition from mills in Japan and elsewhere cutting lower priced Russian species and perhaps Radiata pine. Due to its demand for higher quality lumber, the traditional housing market will be more insulated from increasing competition from these other suppliers.
In 1992, wooden prefabricated housing stood at 15 thousand starts, accounting for about 5 percent of the total market for wooden units. This represents a strong increase over 1980 levels. Japanese prefabricated housing is generally associated with Japan's major home-building corporations, and it often incorporates factory pre-construction with modular building techniques using "unit-bathrooms" and similar products. Some of the firms engaged in this form of housing construction have developed their own proprietary standards, and foreign firms wishing to export to this market will have to work in close cooperation with their Japanese customers.
Japan's Major Softwood Sawlog and Lumber Suppliers
Japanese Domestic Production
Japan itself is the single largest supplier of softwood logs to its own domestic market In 1993, Japanese domestic production supplied 15.9 million CUM of softwood sawlogs to Japan’s. sawmills. This represents a slight decline from the 17.7 million CUM supplied in 1980.
For many years the Japanese have predicted an increase in domestic roundwood production based on the over 10 million hectares of maturing conifer plantations possessed by the country. Economic factors, however, have mitigated against any substantial expansion in domestic harvest The most pressing problem is the high labor intensity of Japanese forestry combined with a chronic shortage of forest labor and a more than fourteen-fold increase in wages since 1960. In light of these and other problems, predictions of domestic harvest increases are becoming less common, and it is assumed that Japanese softwood production will continue at current or slightly lower levels well into the next century.
The Japanese domestic sawmiling industry is likewise in decline. Between 1980 and 1992, the number of sawmills in Japan fell by 28 percent to approximately 15 thousand mills. Gross material inputs for sawmills likewise fell by 25 percent, though much of this decline has been in the last few years. Currently, Japanese mills are struggling under increased prices for their mainstay Douglas fir and Western hemlock sawlogs as well as increased lumber imports from abroad. Continuing declines in domestic sawmills and production capacity are predicted, and this, in turn, will yield greater opportunities to foreign producers interested in exporting lumber products to Japan.
The United States
The U.S., and particularly the Pacific Northwest states of Oregon and Washington, are Japan's largest foreign supplier of softwood logs. The U.S. has long maintained over half of the total market share of Japanese softwood log imports. Since 1990, however, U.S. export volumes have fallen sharply from 10.9 million CUM to 7.6 million CUM, with market share declining from 63 percent to 52 percent. After making steady gains throughout most of the 1980s, U.S. softwood lumber exports to Japan have experienced similar declines since 1990. In the case of lumber, gross export volumes (2 million CUM in 1993) and market share (24 percent in 1993) are considerably lower those for logs. Continuing harvest restrictions related to the Spotted owl and other conservation issues promise to further limit harvests in the Pacific Northwest region and thereby reduce the amount of U.S. timber available for export to Japan. Likewise, calls for increased restrictions on raw log exports in the hopes of increasing domestic U.S. processing could further decrease the availability of softwood sawlogs to Japanese mills. In the fixture, U.S. exporters to Japan will face increased competition for raw materials and, perhaps, increased pressure to raise the value added content of their exports. This, in turn, will give added incentives to producers to find the highest value Japanese market niches for their products..
Siberia and the Russian Far East
Siberia and the Russian Far East constitute the second largest softwood log supplier to Japan. After declining throughout much of the 1980s and early 1990s log exports from these regions showed their first signs of recovery in 1993. In that year Japanese log imports from Russia increased to 4.5 million CUM, a gain of 26 percent over the previous year. Russian market share of Japanese log imports likewise increased from 24 percent in 1992 to 31 percent in 1993. Much of this is seen as a response to resource constraints in the United States. Russian productive capacity and the ability of Russian species (mostly larch, spruce and fir) to substitute for Pacific Northwest Doug]as fir and Western Hemlock however, is limited. Inadequate infrastructure and a chronic shortage of capital currently restricts increases in production, and the quality of Russian timber generally does not meet Japanese specifications for the main structural components used in traditional housing. Japanese imports of lumber from Russia have been relatively insignificant The same sort of processing capacity and quality constraints pertaining to logs apply to lumber as well.
Except for a brief period in the mid to late 1980s, Canadian exports of softwood logs to Japan have remained well under 1 million CUM. For the most part, this is due to long-standing restrictions on raw log exports from British Columbia (the province supplying the overwhelming majority of Canadian wood product exports to Japan). Canadian exports of softwood lumber to Japan, on the other hand, comprise well over half of the total share of Japanese softwood lumber imports. In 1993, Japan imported 5.4 million CUM of softwood lumber from Canada, representing a 65 percent market share and a 23 percent increase in volume over 1992 levels. Strong increases in Canadian lumber exports to Japan are evident throughout the late 1980s and early 1990s, but continued expansion is limited by resource constraints and conservation issues similar to those in the U.S. Pacific Northwest British Columbia does have a large available forest resource, but much of this is in the interior where lodgepole pine and other lower valued species predominate. Though this wood may be suitable for the production of dimension lumber, it is doubtful that much of it will find its way into Japan's traditional housing sector.
In 1993 New Zealand softwood log exports to Japan stood at 1.7 million CUM, accounting for a 12 percent share of Japan's softwood log import market and making New Zealand Japan's third largest softwood log supplier. This 1993 volume was nearly seven times greater than New Zealand's log export volume to Japan for 1986, reflecting strong annual in creases from 1987 to 1992 followed by a 7 percent decline in 1993. Over 85 percent of 1993 exports were Radiata pine. Given the species composition of New Zealand’s forest resource, this percentage is expected to continue or even increase. Total New Zealand sawlog production is predicted to increase to approximately 16 million CUM in the first decade of the next century (as compared to a 1986-1992 average of roughly 6 million CUM of softwood sawlogs). New Zealand has devoted a great deal of effort to increasing the quality of Radiata pine products through intensive forest management and new lumber production techniques To date, however, Radiata pine is used in Japan primarily for packaging materials and other lower valued end-uses (this provides an explanation for the volume decline in 1993, as the Japanese recession impacted the packaging industry more than the relatively robust housing construction industry). New Zealand lumber exports to Japan in 1993 stood at 235 thousand CUM and were likewise dominated by Radiata pine
Chile also has a large plantation resource planted predominantly in Radiata pine Significant increases in Chile's softwood production are predicted beginning in the late 1990s, with total production expected to reach a level of between 21 and 27 million CUM by the turn of the century. The majority of this wood is also expected to be Radiata pine. In 1993 Chile exported 201 thousand CUM of softwood logs to Japan for a market share of only 1.5 percent Softwood lumber exports to Japan, however, stood at 398 thousand ~UM for a share of 4.7 percent of Japan' S softwood lumber import market This reflects strong increases in Chilean lumber exports to Japan throughout most of the 1980s. Most of these exports are thought to be in the form of cants and flitches for remanufacture in Japan into the same sort of products for which New Zealand Radiata pine is used (i.e. packaging materials and other low priced end-uses). In the case of both New Zealand and Chile, increased exports of Radiata pine are expected to. continue to supply the packaging materials market as well as compete with lower-valued products in the residential construction market However, the species is not thought to be an adequate substitute in the higher-valued end-uses, which Pacific Northwest and Japanese domestic species have dominated in the past
Other Factors Affecting Softwood Supply
Other factors affecting future softwood supplies available to Japan include rapid economic growth in China and other Asian nations, export restrictions and supply constraints for Southeast Asian hardwoods, and technological innovations in softwood lumber production. Cross border trade in softwood logs from the Russian Far East to China has been substantial, and New Zealand has reported sharply increased exports to China and Korea in the last few years In general, China and Korea do not possess the same preference for high quality lumber products (residential housing in both Korea and China is constructed manly of brick and stone), and continued economic growth in these countries is expected to most strongly impact the lower end of the softwood market Similarly, export restrictions of Indonesian and, more recently, Malaysian hardwood logs have led to rapid price gains in Japan for Lauan logs used in plywood manufacture. Increasingly, the Japanese have substituted softwood plywood in uses previously dominated by hardwoods. With expected technological improvements, this substitution will continue to expand, thus increasing demand for softwood plywood, veneers and other softwood panel products.
While the previous two factors will tend to increase demand for softwood products, technological innovations in the production of lumber will extend softwood supplies through greater efficiencies or, perhaps more importantly in the context of this report, allow for the substitution of lower-priced species in end-uses currently demanding higher priced softwoods. New laminating technologies that allow for the production of the larger squares commonly used in Japanese traditional housing is one prominent example. Here, clear veneers may be attached to cores produced from lower priced softwoods or composite materials.
Conclusion and Recommendations
In light of supply constraints, it is important that U.S. Pacific Northwest producers locate and fully exploit the best market opportunities for their products. Japan has long provided such an opportunity in the past, but primarily in the form of unprocessed log exports. Given Japan's strong economy (and Yen),stable demand for new housing and well defined preference for quality softwood products, it will continue to provide substantial market opportunities to Pacific Northwest producers in the future. To realize this potential, Northwest producers will increasingly need to understand the characteristics of Japan's differentiated market for processed timber and devise strategies to best exploit the comparative advantage of Pacific Northwest species in higher valued Japanese market niches.
As in the past, the highest premiums will go to those suppliers who can provide the Japanese market with high quality Douglas fir and Western hemlock logs and sawnwood. These premiums, in turn, may justify increased forest management efforts aimed at the production of clearwood and other quality characteristics. Likewise, they may help ameliorate some of the costs entailed in longer rotation lengths and intensive thinnings called for in new forest management regimes designed to produce environmental benefits as well as timber.
While benefits to U.S. Pacific Northwest lumber mills and value-added product exporters from the expansion of 2x4 construction in Japan have been considerable, the current marketing and policy emphasis on expanding the use of western 2x4 construction in tat country should be reexamined to include traditional post and beam market niches. A 2x4-only strategy virtually ignores the lion's share of the Japanese wooden residential construction market, and most 2x4 applications do not necessarily highlight the aesthetic and structural characteristics of Pacific Northwest Douglas fir and Western hemlock Traditional post and beam housing, on the other hand, has resulted in a strong Japanese preference for high quality North American softwoods and has been the driving force behind U.S. softwood exports to Japan and the price premiums associated with this trade. Moreover, in that it allows for increased substitution using lower priced softwoods, 2x4 construction in Japan will, in the future, be more open to competition from the other Pacific Rim producers considered in this study. This is not to argue that the promotion of 2x4 construction in Japan should be abandoned altogether, but rather that greater marketing efforts aimed at expanding lumber and value-added product exports to the Japanese traditional housing market are also called for.
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Authors: John Perez-Garcia, Holly Lippke Fretwell, Bruce Lippke and Xiaoming Yu
A ban on the export of privately-grown logs has been proposed by s6me domestic log purchasers, environmental groups and congressional representatives td relieve the timber shortage caused by court injunctions and state and private land regulations in the Pacific Northwest (PNW). The assumptions behind this proposal are that: (1) log markets require some form of policy intervention--such as a log ban--to divert export logs to domestic mills; and (2) the benefits from added domestic log processing and export of finished products will outweigh the losses incurred by private timber growers? log exporters and consumers. Previous economic studies have generally shown that restricting open markets may benefit s6me processors, but these benefits come at the expense of others and with a substantial net cost to consumers. This study presents results which support the finding from previous studies that restricting open markets leads to higher costs with negative economic impacts in the restricted region, within the U.S. and across the globe.
This study examines the assumptions behind a log export ban proposal. First, it draws attention to recent data on log export declines as evidence supporting the contention that open markets provide an efficient response to timber supply shortages. It then addresses the factors needed to determine the benefits and costs of a log export ban on global and regional markets: (1) how log and lumber trade flows are redirected and at what costs; (2) who is impacted regionally; and (3) who benefits and who pays at the log and lumber levels. The question of how an export tax differs from a log ban is also considered since log export taxes have been proposed as an alternative to a log export ban. This raises the general question of whether there are other forms of market interventions rather than a log ban that might relieve the log shortage for mills with less negative impacts on other producers. Implications of the impacts of a log ban on job markets and forest management are discussed briefly.
The CINTRAFOR Global Trade Model (CGTM)--a product of over ten years of research by a number of international experts--characterizes regional timber, processor and consumer markets, and simulates the international flow of logs and products from wood surplus regions to wood deficit regions. The model is used in this study to analyze the global and between-region trade flow response to log export ban and tax policy proposals. This modeling exercise provides a first approximation of the proposals' impacts. Potentially important within-region issues--such as the location of timber relative to mill capabilities, and the many different categories of jobs that are impacted by changes in trade flows--are important areas of further research work.
Open market forces divert export logs for domestic processing: Data on log exports from Washington and Oregon indicate a 40% declined since 1989 as a consequence of higher regional timber and log prices that have been caused by the timber shortage. These data suggest that higher log prices under open market conditions have already redirected a substantial. amount of previously-exported logs to domestic processors. if logs were banned from exports--i.e., if closed-market conditions were to exist--the price conditions forcing the diversion of export logs to domestic markets would not exist. In economic jargon, open markets are more efficient than restricted or closed markets since open markets allow prices to stimulate the next lowest cost suppliers to replace the timber harvest reduced by policy constraints. Open markets faced with a timber supply shortage allow the price for timber--the product in shortage--to rise, coaxing out the next least costly increment in supply from around the globe. In contrast, a log ban supplements the wood available to processors in the log-deficient region by diverting logs from export markets. This form of market intervention prevents logs from reaching their highest valued markets. Log prices in the restricted region will then be lower even though timber harvest restrictions have reduced timber supply. Log prices will be higher in the alternative, unrestricted markets where timber supply was not reduced. Deviations from an open market response caused by interventions impose higher costs on consumers and a large number of processors. Only those processors within the restricted timber market will see lower log costs. Transportation costs to move the resources to global markets will also be greater under a ban or tax.
Lower prices reduce the supply in the timber short region: The COTM estimates by 1995 a $48 per mbf decline in the PNW real domestic log price from a private log ban and a $150 per mbf increase in real log prices in Chile and New Zealand, two regions representative of remaining ½en market log suppliers. A similar $150 growth in real log prices is estimated by the model for Japan, the major log importing country. Real price increases are estimated to be much smaller in other markets that are not directly linked through trade to the Pacific Rim log flow. Price increases are measured as the difference between simulations ~f all regional markets after the imposition of a private log export ban from the PNW and baseline market conditions without a ban.
The lower real domestic price results in an annual 500 million bd ft reduction by 1995 in private timber harvest in the U.S. West region. The redirection amounts to 21 percent of logs previously exported under baseline conditions. The countries previously importing U.S. logs are only partially successful in offsetting their lower log trade volumes with the U.S. by increasing their domestic log production and log imports from other regions. In this manner the previously importing countries offset only 15 percent of the log trade volume lost through the imposition of a ban. There do not appear to be enough open market log suppliers to offset the loss in Asia's softwood log imports from the U.S. outside of Russia. While Russia may respond to this shortage, there is no economic history to characterize such a response, which in any case appears plausible only in the long term, given their current political problems.
Log importing country losses are much greater than PNW processor gains: The lumber volume reductions by overseas log-importing mills is far greater than the gains in log consumption by U.S. firms. Lumber shutdowns in log-importing countries are 70 percent greater than additional processing in the U.S. West Higher log prices, the loss of higher-yielding lumber mills, and the decline in Western harvest levels all contribute to the greater decline in processing
capacity in these regions. the large decline in overseas processing capacity implies significant reductions in their associated labor markets.
Canadians gain the comparative advantage in lumber markets: The volume loss in lumber production in log-importing countries is made up by greater amounts of lumber imports, almost totally from Canada. While the Canadian log export ban has shifted the comparative advantage to the U.S. PNW in the Pacific Rim log markets, the Jog ban simulation indicates that a U.S. log export ban will shift the comparative advantage in Pacific Rim lumber markets to Canada, and the comparative advantage in logs to New Zealand, Chile and perhaps even to Russia.
Consumers pay higher lumber prices even in the U.S.: While the price of logs declines in the expon4estricted supply market, other regions see log prices row. The log price increase becomes an additional cost to lumber producers. U.S. lumber prices rise 1.2 percent relative to the baseline. Other markets respond similarly with the exception of New Zealand and Chile. Lumber prices increase in these two markets as much as 30 percent due to a high growth in log prices.
Who gains and who loses: From an economic and social welfare standpoint the beneficiaries of habitat preservation--the policy action resulting in the log supply shortages--should pay for the cost of a program aimed at reducing the negative economic impacts on domestic mills from mandated timber harvest reductions. As a measure of a more equitable program, the U.S. public should pay for the costs to offset the impacts of these constraints on timber supply since the beneficiary of federal habitat preservation policies is the U.S. public.
Instead, under a log ban proposal, the model estimates an annual $395 million decline in timber value in 1995 for timber producers in the restricted region due to lower domestic log prices. This value declines further when the price premium for quality timber currently paid in foreign markets and not contained in timber received for domestic processing is included in the above loss. The log price premium is estimated to be $262 million, raising the total estimated loss to almost $658 million annually. The model estimates that the region's lumber producers will gain almost as much, as they see their log costs decline. According to the results, they also see a lift in national lumber market prices and their production volumes increase. However, it is the consumer that ultimately pays the bill. Since the model predicts that PNW log and limber producers direct a high percentage of their production to the U.S. national market, consumer costs in the western region are much tess than lumber producers gain. However, the region still suffers a net loss when timber producer losses which include the export price premium are considered. U.S. lumber consumer cost grows by an annual $218 million. Therefore, in the U.S., the consumer and PNW timber producer pay for implementing a federal policy to ban private log exports. M important implication from these results is that one can expect less investment in timber management which, over several decades, would result in sustainable harvests of lower volume and quality, forcing consumer costs to grow further as a result of the current timber producer's losses.
Since the model suggests that overseas log processing mill closures are greater than U.S. production gains, it is not surprising that the international consumer pays even more than the U.S. consumer according to the study results. Around 70 percent of the total annual $733 million increment in lumber consumer cost is outside of the U.S.. The total global lumber consumer cost per volume of logs banned is almost $280 per mbf. The loss of higher-yielding processors and the use of more costly substitute timber causes the growth in global consumer cost to be large. The modeling results indicate that while the principles of free trade offer global savings, a log export ban is a restriction to trade which adds to global costs, reduces global efficiency, and lowers the world's welfare. It also produces negative economic impacts in the log ban region greater than gains to lumber producers.
Preliminary economic and job loss estimates: The model characterizes the price and cost changes in lumber and log product flows at the regional level. Neither the within-region transportation costs nor job sensitivities to revenue impacts is directly modeled. Instead, the study uses changes in revenues provided by the model to arrive at preliminary measures of job market impacts. Revenues determine both the number of jobs and wage levels that can be supported, hence revenue impacts are the better measure of economic policy effects. Using a national average job cost in relation to the total value of gross domestic product, the U.S. consumers' lumber cost increase of $218 million from a log export ban might result in a loss of about 5000 jobs annually across the nation. The PNW regional loss of more than $50 million would imply annual regional job losses of 1200 more than those gained by processors. In the longer term, regional losses would be larger as the harvest level declines with less investment in timber. In the short term, a poor distribution of mill capacities relative to the location of the timber currently being exported would also raise these job loss estimates. Since the revenue estimates only included the impact on lumber consumers, a full accounting for all forest products including panels and fiber products as was the loss in port activities, could increase these job loss estimates significantly.
A log export tax as an alternative to a log ban raises revenues but with additional risks: A
log export tax has the potential to collect monopoly rents for timber in shortage rather than to give the region's .comparative advantage to other timber suppliers without any compensation. Global trade model simulations with an incremental tax on log exports indicated that the tax revenue declines rapidly with any log export tax greater than 13 percent. A 13 percent tax is equivalent to a $66 per mbf tariff on log exports, roughly 62 percent of the premium estimated for log export prices over logs for domestic processing in 1991. Results from the tax simulation indicate a 35 percent reduction in PNW log export volume, corresponding to a 19 percent decline in Japanese log imports.
Under a tax scenario, revenue losses by western timber producers are predicted slightly less than the proportionate impact of a log ban, processor losses increase, especially in log-importing countries, and the consumer costs are nearly proportionate to the costs under the log ban scenario. The modeling results indicate that the export tax, similar to the export ban, reduces timber prices. Hence, timber managers effectively pay for the tax. In theory, the collected tax may be used to offset the negative impact of the tax on timber management However, the results suggest that the tax revenue would not fully compensate for the timber producers' losses, even if it was allocated to them. Similar to a log ban, an important implication of the tax scenario results is that there will be a reduction in timber investments and harvests in the longer term.
Since a tax is collected from foreign buyers it poses both new legal and retaliation risks. Several conditions should exist in order to minimize the losses in the PNW region. It would be necessary (1) to channel the tax revenues to timberland owners to reduce their loss and maintain their investment, (2) for log export purchasers not to retaliate, and (3) for potential new suppliers like the Russian Far East not to receive an infusion of investment needed to increased exports. These are difficult conditions to control by the tax imposing regions hence an export tax policy incurs additional risks beyond those associated with a log export ban.
Other alternatives should also be considered: Open markets provide the most efficient avenue for response by timber producers and processors to alleviate timber supply shortages. Hence open markets are the best economic solution to timber shortage problems. Either a log ban or tax causes large welfare losses in the restricted region, the nation, and the globe. Therefore either would be less efficient than allowing the open market to guide the diversion of export logs to domestic mills. Since both a ban and tax penalize timber--the commodity for which supply has been reduced--any preferred alternative should insure that the benefits which are directed to those mills being impacted by log shortages do not exacerbate the timber supply problem. Furthermore, a tax, as is the case in a ban, does not reduce the cost to foreign buyers of timber and lumber who do not benefit from U.S. preservation programs. The preferred economic alternative would be for the U.S. general public--as the beneficiary of the habitat preservation--to bear the costs imposed by a policy to direct more logs to PNW mills.
A credit given to affected mills may provide these aspects of a more effective intervention program. Tax credits for processing wood will improve the domestic processor's ability to compete with foreign processors for logs, without negatively impacting the timber producer. A tax credit program would benefit domestic processors who could then bid pan of the credit back to timber when making bids to purchase timber. This approach would reduce the negative impacts on timber producers and increase the management and the output of timber, two large negative outcomes of either a log ban or tax policy. U.S. taxpayers who benefit from timber preservation might then pay for a larger share of the global cost through higher lumber prices, and the cost would be directly invested. in making U.S. processors more competitive; Such a program can be considered economically efficient relative to the intended goals--such as reducing job market and investment behavior impacts--even though its costs would be absorbed by the U.S. consumer with associated job losses nationally rather than regionally.
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Pacific Northwest Hardwoods Capture International Attention: An Analysis of the Washington State Hardwood Industry
Author: Hakan Ekstrom
Washington State Hardwood Sawmilling Industry 1990
Hardwood lumber production in Washington grew 93 percent over the period 1980-90. This compares with softwood lumber growth of 24 percent and a national growth rate for hardwood lumber production of just 21 percent over the same period. Hardwood species like red alder, which were until recent years considered undesirable weed species in the softwood forests of the Pacific Northwest, have increased remarkably in value and now provide financial returns as great as softwoods. The low level of historic interest in hardwoods has resulted in limited knowledge about the northwest hardwood resource and Washington state hardwood lumber producers. These facts together with a growing worldwide demand for hardwoods motivated a study by the Center for International Trade in Forest Products (CINTRAFOR) at the University of Washington to understand the changing capabilities of Washington hardwood lumber producers and their markets.
Washington Hardwood Sawmilling Industry
The Washingt6n hardwood sawmilling industry of 1990 was twice as large as in 1982, with direct employment of 850 people. The industry consumes approximately 340 million board feet of timber, of which 75 percent was manufactured into lumber and pallet stock. The remainder was utilized for pulp chips. Washington hardwood production represents almost eight percent of the total lumber production in the state and is over 2.5 times the hardwood production in Oregon. The nine major hardwood sawmills, representing about 98 percent of Washington's total hardwood production, are all located west of the Cascades in rural communities. The primary species used were western red alder (Alnus rubra Bong.) and big leaf maple (Acer macrophyllum Purch.).
Since most of the raw material for the industry, about 74 percent, was purchased from private timber owners and only one percent from federal timber sales, preservation of northern spotted owl habitat--most prevalent on federal lands--should not substantially impact hardwood timber availability.
Swedish Hardwood Sawmills
The author has also carried out similar research in his home country, Sweden. With a 'mailer production, Sweden has ten times as many hardwood mills, most of which produce the higher-valued secondary manufactured products, used for furniture, parquet flooring, cabinets or mouldings. While the Washington state hardwood sawmills are more quality-oriented than many of their softwood counterparts, they are still far from the value-added manufacturing facilities observed in Sweden.
Hardwood Markets for Washington Sawmills
Hardwood markets do not share the characteristics of softwood commodity markets. Quality and customer service attributes are often more important than price. Mill owners and managers said that the most critical production features were the ability to produce kiln-dried, high quality, accurately graded planed or surfaced lumber. A mill's reputation, its ability to deliver on time, and its personal relationships with its customers were rated more important than competitive pricing and the ability to provide custom orders. Competitive pricing and custom orders were considered more important by a few of the mills, however.
Hardwood markets, growing faster than softwood markets, have also shown greater stability with little change in demand with the boom and bust housing cycle. Alder has been discovered as a valuable species, and will play an increasing role in rural timber-dependent communities. While hardwood chips are also valuable for pulp and paper production, the higher-valued furniture, cabinet and interior applications, will set the pace for much of the future industry development.
Only about seven percent of the Washington-produced hardwood lumber is utilized by local secondary manufacturers, with almost no secondary manufacturing in local lumber mills. California and Oregon firms consumed large amounts of the lumber, however, and exports take about 36 percent of the volume. The foreign market is very important for the industry, since export customers usually purchase the higher quality products. While Japan is the largest market, recent growth in European markets has been dramatic.
The recognition of alder as an important commercial species has resulted from its increased worldwide use in higher- valued applications. Higher-grade lumber was used mainly for furniture where the wood was visible (21%), and for cabinets (22%). Upholstered furniture (17%) together with pallets (33%) were the principal end products for low-grade hardwood lumber. Small quantities were also used for mouldings, toys, and for the do-it-yourself market.
The increased demand for red alder lumber has influenced its price, especially for the higher grades. Between 1988 and 1990, the price of kiln dried 4/4" lumber of the highest grade increased approximately 25%, from $766 per thousand board feet (MBF) to $955 per MBF.
Red Alder Exports from the US
In recent years, Pacific Northwest hardwood species, primarily red alder, have been elevated from positions of relatively low value into commercially important wood species in world trade. Red alder, only processed at Oregon and Washington sawmills, was the number three hardwood lumber export by volume from the United States in 1990, behind the species groups white oak and red oak. In log form alder was the number one hardwood species exported from the U.S. in 1990.
There has been a substantial increase in the export of alder lumber during the last ten years. In 1981 the export trade of alder lumber totaled only two million board feet (MMBF), while ten years later in 1990, the trade had reached 56 MMBF.
The most important single market for alder lumber during the last decade has been Japan, even though its share has been declining recently. The Japanese market accounted for 95 percent of the lumber exported 1981, while in 1990 its share had decreased to 55 percent.
The new and growing market has been in Europe, which now purchases about 25 percent of the alder lumber exported. The main importing countries in Europe are Italy, Germany and France. The total alder export to Europe during 1990 was 13.8 MMBF. While the Washington hardwood sawmills have increased their lumber production by 50 percent since 1985, the export of alder lumber, which predominately originates from Washington State, has increased by almost 700 percent.
Washington Hardwood Supply, Growth and Harvest
The hardwood timber resource in Washington is growing, with the annual cut at about half the annual growth. In the region west of the Cascades, 15 percent of the growing stock on timberland is composed of hardwood species. Red alder was the most common species (67%) and, together with big leaf maple and black cottonwood, accounted for 95 percent of the hardwood volume. In the Southwest region of the state, the annual harvest of hardwoods was 7 MMBF on state lands, which is only ten percent of the total annual growth. This situation is in contrast to forest industry owned land in the same region, where the removal rate is 26 percent higher than the current growth rate. The potential for expansion exists. It may be possible for the Washington State Department of Natural Resources to increase the harvest of hardwoods from the land it administers and become a bigger and more important timber supplier for the hardwood sawmills.
Management of Hardwood Stands
Managing a hardwood stand, whether pure or mixed with conifers, can substantially improve the quality and increase dimension yield The alder regeneration cycle is shorter than that of softwood species. With intensive management of red alder, which is a fast growing species with good self-pruning, high quality sawlogs and peelers can probably be grown in 28 to 37 years.
It is important to inform forest owners, loggers and contractors about the value of hardwood logs and about the hardwood industry that is prepared to pay for the sawlogs.
If too many hardwood logs are cut and chipped today, the supply of sawlogs will be limited in the future. As this study found, the economics have been rapidly changing, making it pay to grow alder for higher-value markets.
Key Factors for Future Success
There is little doubt that Washington state hardwood sawmills can be successful in the future. It is the opinion of this author that it is necessary to address the following key areas to yield long-tam benefits for the companies in this industry:
* Develop closer contacts with the end user
* Increase value-added production.
* Develop a skilled and loyal labor force.
* Intensify quality control.
* Increase research and development.
* Build awareness among forest owners of the value of hardwood.
* Maintain a secure and stable timber supply.
Future hardwood products
It is important for the sawmills to focus on quality control, to utilize the wood to a higher-degree and to produce a higher valued product than commodity lumber Lower-grade lumber products, No.1 Shop to No.3 Shop, comprise about 45 percent of the hardwood sawmills production; these grades should be further utilized. No.1 Shop lumber, together with No.2 Shop, which is the most difficult grade to sell today, could be remanufactured for cut stock, edge-glued panels, finger-jointed and edge-glued components.
Most of the mill managers interviewed indicated that the future success of the industry would rely more heavily on value-added products. Another broad area mentioned was the production of more custom-cut products for the furniture and cabinet industries.
Planned investment, however, generally fell in the area of upgrading primary log breakdown facilities, indicating that many mills must concentrate limited investment dollars in more efficiency at the headrig just to keep up with industry standards.
With the cost of capital rated as the second largest production problem next to labor costs, mills will be constrained in their ability to invest in value-added production.
Most hardwood lumber produced in Washington is leaving the state. Only seven percent of the alder lumber produced is currently utilized by secondary manufacturers in the state (pallet production not included). The volume of hardwood lumber products flowing out of the state for further manufacture may suggest an opportunity for Washington remanufacturers and secondary manufacturers to expand their use of alder and other local hardwood species.
The labor force
To be more competitive, the United States, with higher labor costs than many other countries now producing commodity lumber, should concentrate on manufacturing high-quality products. Low-quality products and “bulk-type” production can be made less expensively in countries that have lower wage structures.
By taking measures to develop a flexible and knowledgeable labor force, performance and recovery rates can be high. The skill level of the labor is particularly important when customers specifications may be more demanding and there are more custom-made products and value-added processes required.
Japan is the largest export market for alder lumber today, and will probably continue as a large and important market, although its share of the total alder exports from the U.S. will decrease. The new and expanding market is in Europe, especially Germany, as producers substitute alder and other temperate species for tropical timber imports, mainly because of policies influenced by the European Green Movement. If sawmills in the Pacific Northwest can deliver high quality lumber and components and follow and analyze customer demand, the European market will be much more important in the future.
Restrictions and Opportunities
Hardwood sawmill managers said that their greatest concern for the future was the timber supply. While currently not a problem for most of the mills, timber quality and availability were foremost on the minds of those in the industry when asked about future critical issues.
Availability of timber is a major concern of the purchasing mills, as much of the hardwood saw timber is a byproduct of softwood timber harvest, and the softwood harvest is expected to decline. State and federal regulations regarding timber supply as well as environmental issues were the top three overall concerns facing mill-owners. Actions by the Washington State Department of Natural Resources with respect to hardwood sales, timber availability, and environmental protection were of great importance to a majority of those interviewed.
Besides the problem of limited investment dollars and the cost of capital, the issue for many local hardwood producers may become how to procure sufficient timber supply to maintain consistent quality and mill production. These are the main restrictions but there are also opportunities for the hardwood sawmills today.
Red alder represents an under-utilized timber resource. It is a fast growing species, it has excellent wood characteristics, and it has a growing demand in domestic and international markets. This all contributes to making red alder a potentially important species for forest owners, for sawmills and for secondary manufacturers in the Pacific Northwest.
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Authors: Craig Buhler, David G. Briggs
Although comprising a small fraction of the forest resource in the Pacific Northwest (PNS), the region’s hardwoods are becoming an increasingly important sector in terms of both domestic and overseas markets. This has occurred despite a generally negative attitude among foresters and the general public. This attitude has been fostered by a variety of factors. Perhaps foremost is the common situation in which lands logged of coniferous stands are invaded by light-seeded, pioneering, fast growing hardwoods, especially red alder. Because this invasion prevents natural restocking of conifers and frequently overwhelmed planted conifer seedlings, hardwoods became viewed as pests. Prior to the 1960’s and 70’s, vast areas of former conifer lands became covered by vigorous stands of hardwoods. Since that time, foresters have invested substantially in hardwood control programs. Young hardwoods were sprayed or manually removed during early thinnings to prevent competition with planted conifers. Older hardwood stands were converted to conifers by logging off the hardwoods, salvaging better material for lumber or chips, and replanting with conifers. These activities, combined with various statement in corporate and public agency reports of what was being done to eliminate the hardwood problem and get lands back into productive conifers, conveyed an impression to the public that hardwoods were worthless weeds. Furthermore, early use of red alder in hidden parts of furniture and as an inexpensive substitute that was often stained to imitate other woods reinforced its reputation as a lesser species. Unfortunately, these attitudes have persisted while alder has gained acclaim in both national and international markets for furniture lumber and for pulp chips. It is widely regarded for its many good properties and, in furniture, for its versatility to be used naturally or to imitate many other species. Interest has also grown in several other Northwest hardwood species. Indeed, during the recession of the early 1980’s , a Weyerhaeuser executive state “In the 1980’s, we suddenly found that our most consistently profitable lumber operations in the (Northwest) region were two small alder mills, which were developing customer ties in the Japanese and California furniture industries.” (Bingham,1986).
Although many are becoming aware of the increased value of the PNW hardwoods, there is little current information on the present size and scope of industries using the resource, developments in markets and the resource base and issues or problems that are confronting this industry.