• Baton Rouge

Despite a significant forest resource, Louisiana is a net importer of wood fiber from neighboring states, suggesting that the state is fully using its timber resource, "and then some," according to Henson Moore, president of American Forest and Paper Association.

Moore is a native of Louisiana and a former Congressman from the Baton Rouge District. As head of the AF&PA, the national trade association for the forest products industry, he is now based in Washington DC. He was a keynote speaker at the LSU AgCenter "AgOutlook 2005" conference in Baton Rouge in January. Following are extensive excerpts from his presentation, titled "The Status of International Trade in the Forest Products Sector."

Louisiana is an important part of America's forest products industry with 11 paper and paperboard mills, about 200 wood mills of varying size and $6 billion annually in sales of timber and manufactured forest products.

The paper and wood mills employ 19,500 people, and another 8,000 are employed in harvesting and transporting timber.

Despite a significant forest resource, the state is a net importer of wood fiber from neighboring states. Louisiana ships saw logs and veneer logs to neighboring states, but imports pulpwood from Arkansas, Mississippi, and Texas, according to a Forest Service report. This suggests that the state is fully using its timber harvest, and then some.

Through the port of New Orleans, the state exported to other nations forest products valued at $280 million in 2004. Of that, 81% was paper, including key products of linerboard, bleached board, and printing-writing papers; 17% was wood products, softwood lumber, plywood, and veneer. Logs and chips were just 2.5% of the exports.

Through the same port, $430 million worth of forest products were imported from abroad. Most of these imports--75%--were solid wood products. The remaining 25% was paper, much of it printing-writing.

The data I have cited show that Louisiana is a key player in the forest products industry. Moreover, as we'll see, your state has been holding its own better than the national industry.

The American forest products industry has been experiencing difficult times over the past few years. The business has always been cyclical, but research we've conducted at AF&PA is showing that the industry is confronted with serious competitive issues that go beyond the normal business cycles.

The industry has not been competitive with our overseas counterparts on key issues like an economical fiber supply, the cost of environmental regulation, taxes, level international playing field, labor costs, and energy.

While we've made some progress in these areas over the past few years, these remain fundamental competitive issues for our industry.

As a result, imports of forest products are increasing and domestic production capacity is decreasing.

•What's happening to paper

From 1999 to 2003, U.S. paper and paperboard production fell 9%--the longest and steepest decline recorded.

This was caused by a weak U.S. economy in 2000-2001, and rapid import growth, helped by a strong dollar.

In 2004, production went back up, but remains well below its 1999 level. Some of that production may not get made up because since 1997, U.S. companies have been forced to close 104 mills.

These closings, along with strong productivity improvements in mills that continued operating led to more than 70,000 jobs lost.

The pace of closing slowed this year as paper markets firmed.

In Louisiana, the state's paper and paperboard production capacity dropped about 2% since 2000. No entire mills were closed. Instead, companies stopped operating some machines, or shifted to lighter grades of paper.

During the same period, the national paper and paperboard production capacity went down at nearly double Louisiana's rate. That same time period,--1997 to presenty--was also characterized by rapid growth of imports.

Starting in 1997, exports stagnated and began to decliner, while imports soared.

Exports began to recover this year, but imports continued to grow as well. It's worth noting that the U.S. tends to export linerboard and bleached paperboard, and import newsprint and printing-writing papers. Most of the newsprint comes from Canada, but Europe and Asia have been taking an increasing share of printing-writing imports.

What does the future hold for U.S. paper production? AF&PA's analysis predicts an annual production expansion of only about 1% per year for the next decade. The growth rate was double that in the '80s and '90s.

Market factors contributing to this slow growth include increasing electronic substitution--electronic organizers, internet, e-mail--plus potential product replacement with plastics, in place of boxes, cartons, and paper bags, and then the continued strong import competition.

Some American producers are considering building new capacity in other countries such as Brazil to take advantage of better competitive conditions.

• What's happening with lumber?

On the wood side of the industry, demand is cyclical, but increasing over time.

We're in an up cycle now--a record amount of softwood lumber was consumed in 2004, b ut imports are increasing here as well, up to an estimated 39% of the U.S. market this year.

Currently, the U.S. is imposing anti-dumping duties on Canadian softwood lumber imports, which Canada is contesting. Canada's share of the U.S. import market has been fairly steady, while Germany, Brazil, and Chile have increased their share substantially.

The demand for softwood lumber may soften in 2005 if rising interest rates slow housing starts. Long-term, we expect softwood lumber demand to grow more slowly than it did in the past because of imports and displacement by I-joists and other engineered wood products.

The picture isn't much different for oriented strand board. Nearly all the OSB imports come from Canada. It the early 90s, imports comprised just 17% of the U.S. market in this line. It's up to 37% now.

That (OSB) is a product we invented, too. A total of 140 wood product mills have closed since 1997--67,000 jobs lost. Whether paper or wood, imports are rising. while domestic production is falling.

Now, why?

• Fiber competitiveness

I mentioned earlier that fiber costs are a key competitive factor--the most expensive element in any forest product.

U.S. fiber costs are near the highest in the world--exceeding competitors' including Brazil, Chile, Indonesia, and New Zealand. The gap has narrowed in recent years and prices have fallen in the U.S., while increasing in most other regions.

A big reason for the improvement we have seen is our industry's policy successes. We've been able to limit the impact of the Endangered Species Act, and TMDL provisions of the Clean Water Act.

Congressman Jim McCrery's tax language to expense rather than capitalize reforestation will save then industry $65 million over the next decade.

We've also been strong advocates in spreading forestry certification programs. We established the Sustainable Forestry Initiative program, which creates strict environmental standards on our companies' forestry operations.

Since its inception, SFI has more than doubled the acres enrolled in the U.S. and Canada. May of those acres have undergone third=party certification--an unbiased outside organization verifying that the program guidelines are being followed and are accomplishing their stated goals.

• Labor costs

Labor costs are a significant competitive factor--the second largest cost item in most products. U.S. pulp and paper mill workers are more highly paid per year than those in competition regions such as Latin America, Asia, and Eastern Europe.

A study we had conducted at AF&PA showed that U.S. mill workers earn six times more than Latin American mill workers, and eight times more than Eastern Europeans. Chinese manufacturing workers are earning about 64 cents an hour. American workers are getting $21 an hour. This is a competitive reality that is unlikely to change significantly in the future.

• Energy costs

American companies were once competitive in this area--the third largest cost item in forest products. That has changed, largely because of steep increases in natural gas prices, which doubled in 2003 alone.

Natural gas accounts for almost half of the forest products industry's [purchased energy supply. The increase in natural gas prices during 2003 cost our industry more than $1 billion. The U.S. industry now has the highest natural gas costs among its competitors.

• Other costs factors

Recovered fiber has been an increasingly important fiber source for the industry. Recovered fiber prices are increasing, primarily because of export demand from China.

The industry recently met its goal of recovering 50% of all paper used in the U.S., and has set a new 55% recovery goal to help ease the problem.

Taxes have been a competitive issue. The dividend tax cut helps, and so does replacing FSC-ETI provisions with a cut in tax rates on manufacturing from 35% to 32%, and as I mentioned, Congressman McCrery's reforestation expensing provision.

Even with the improvement, U.S. forest products will still pay a higher effective tax rate than most of our competitors.

• Market access

Around the world, a number of countries have been building capacity and competing with America from behind a thicket of tariff and non-tariff barriers designed to limit access to their markets.

Meanwhile, they've been enjoying nearly unfettered access to ours. We support elimination of all tariffs, and we're working through various means to make sure that this remains a priority for U.S. negotiators. U.S. tariffs are near zero, which puts us at a competitive disadvantage with competitors such as Brazil, China, Indonesia, and Malaysia.

High tariffs have allowed countries in South America and Asia to build first-rate facilities--often with direct government subsidies. China is currently engaged in a massive buildup of its forest products industry.

Tariffs are easy to understand, and relatively east to deal with. More difficult are non-tariff barriers, which can have a similar effect, but are more subtle.

Non-tariff barriers include--standards, regulations, or conformity assessments. These are usually combined into building codes, which of themselves are not a problem. They become a problem when the codes are constructed for reasons not related to the material's performance in its stated use.

Subsidies also fall under the broad heading of non-tariff barriers.

I just got back form ten days in China, where I raised the issue of subsidies. APP has suspended payment on $14 billion worth of loans. Meanwhile, its China operations have continued to grow, fueled by non-market loans issued from China's government controlled banks

Governments should not be paying for capacity additions or upgrading existing facilities, nor should they be providing below-market loan subsidies. Such subsidies distort markets by adding or protecting non-economic capacity, and preserving less efficient mills that would be closed in a competitive market.

Currency manipulation has been a newer tactic used by some nations to gain competitive advantage.

Countries like China, Japan, South Korean, and Taiwan deliberately took steps to artificially lower the value of their currencies relation to the dollar. They did this to maintain export price competitiveness and this practice more often than offset any tariff concessions they made in trade negotiations. These four countries account for the majority of America's global trade deficit in manufactured goods.

The Bush administration--with our urging--make achieving a market valuation of the dollar a priority, and the dollar has begun to return to a more appropriate value.

• Conclusions

The U.S. forest products industry is learning to operate in an environment that's permanently more competitive. We face increased international competition, as well as marketplace threats such as electronic substitution, competing materials, and maturing markets.

While we've made progress recently to ease regulatory pressures and reduce the tax burden, much more must be done to improve the industry's competitiveness.

Louisiana can best maintain its competitive position by investing in mill modernization and taking steps to ensuring a sustainable and economic fiber supply.

We are not likely to see an expansion in paper or wood products manufacturing in Louisiana unless more progress is made to improve out competitiveness.

Back