By Richard Vlosky
LSU AgCenter

Adapted and expanded from: Geneva Timber and Forest Study Paper 24, Forest Products Annual Market Review 2008- 2009. United Nations. New York and Geneva, 2009.

The United States financial and economic crisis escalated in 2008, and spread globally, causing devastating effects international forest products markets. The roots of the crisis can be found in the main driver for wood products demand - housing; from 2.2 million starts in 2005, in 2009, US housing starts fell to below 500,000 units. Negative effects on US lumber and panel prices have been dramatic (Figure 1).

The dramatic reduction in consumption of forest products in North America, 80.9 million cubic meters between 2007 and 2008, has ramifications throughout the forest sector. Demand for sawn softwood has fallen dramatically during 2008 and the first months of 2009; the effects on the industry have been disastrous with overall production in North America falling by almost 19% and half of the softwood lumber production capacity has at least temporarily curtailed production.

Although not generally a construction material such as sawn softwood, the hardwood markets were nevertheless depressed by the housing crisis in the US. The decline started years ago when imported furniture, millwork and moldings, primarily from China, reduced demand for US production. A significant proportion of value- added imports have been based on US hardwood logs and sawnwood exports to the remanufacturing, value- adding countries. But in the current housing crisis in 2008- 2009, the demand for hardwood products is even weaker. US producers sought alternative export markets but sawn hardwood exports from the US contracted by 23.6% in 2008. The US hardwood industry in 2009 is in crisis, with both production and sales forecasted to fall further and facilities closing.

The current situation for wood- based panels is no brighter. In the US, in 2008, production of hardboard decreased by 13%, MDF production by 9.3% and particleboard production by 14.5%. A total of 15 mills closed in North America, although two OSB mills opened, resulting in a net capacity loss of 2.2 million cubic meters, bringing capacity utilization down to its lowest levels since the early 1990s. This has had a serious impact on profitability.APA - The Engineered Wood Association has forecast that continued housing market weakness will likely remove an additional 830,000 cubic meters of plywood capacity and an additional 1.5 million cubic meters of OSB production capacity in 2009 in the US. Engineered wood products (EWPs) have also been severely hit by the housing crisis and demand has plummeted. This applies to all three of the major types of EWP: glulam beams, I- beams and laminated veneer lumber. Production has been declining together with housing construction since 2005, and this is unlikely to change until housing starts rise again.

The paper industry continues to go through painful structural transition as the customer base changes; the global economic crisis has hit the industry at the worst possible time, and production in North America has decreased 5.3% in 2008, with prices continuing to fall.\par }{\plain Over the past year, global pulp and paper demand deteriorated rapidly as the economic crisis abruptly reduced industry and consumer spending. Most grades of paper and paperboard experienced significant decline. Currency exchange rates play an important role in the global paper and pulp trade, and the weak dollar made US production relatively affordable. US output was down by 17% in the first five months of 2009 relative to the same period in the previous year. The decline is particularly evident in newsprint which continues, not simply because of lower readership, but now due to a structural shift in advertising expenditures from newspapers to electronic media. As a result, several large newspapers declared bankruptcy over the past year.

Additional Developments

The wood energy sector seems to have been immune to the global economic recession.\'f2 The quest for renewable energy sources, in the light of recognition of the dangers of climate change, regardless of cause, with the drive for energy security, is producing a structural change within the forest sector; driven by government policies, despite the economic crisis in 2008- 2009, wood energy markets remained buoyant. Demand for alternative fuels, including wood biomass, continues to grow steadily due to incentive policies and also relatively high energy prices. Although crude oil prices dropped 76% since their peak in the summer of 2008 to end of the year, electricity and other energy prices continue at high levels. Much attention is now focused on the liquid biofuels sector and most of the research and development support is currently directed there. In the US, legislation for biofuels production is currently being developed and depending on the definition of biomass, wood from different kinds of stands and different forest ownerships, will or will not qualify for incentives to produce wood- based liquid fuels, heat or power. There is potentially a huge upside for wood demand. Large biomass- consuming energy projects have begun over the past few years, and after completion, the energy production facilities may create a permanent demand for significant amounts of woody biomass. Because the raw material supply for the energy sector has become even tighter since harvesting levels throughout the US are lower than in previous years, there are fewer harvesting residues and fewer byproducts from wood processing available for fuel or electricity generation. This is leading to a situation in which it may be feasible to consider burning roundwood directly, without sawmilling, panel manufacturing or pulp & paper manufacturing. The composite panel and pulp/paper industries are most vulnerable to wood- based energy industry development.

Wood- to- ethanol is emerging slowly whereas wood pellet production in the US, primarily exporting to Europe is a clear leader in alternative uses for wood in the US. World pellet markets have grown significantly over the years and now clearly exceed 10 million tons and will double again by 2012 if the current annual growth rate of 20% continues (Figure 2). Europe is the largest consumer and producer of pellets.

In addition to the traditional drivers for certification of sustainable forest management, the production and trade of certified forest products are gaining new support to mitigate climate change through forest management practices. The political push for renewable energy sources, including wood, is accompanied by public purchasing policies for certified wood fuels.

The successor of the Kyoto Protocol is, at press time, being re- negotiated in the United Nations Climate Change Conference in Copenhagen, and there are high expectations that Reduced Emissions from Deforestation and Forest Degradation (REDD) will strengthen the forest sector carbon markets. Many countries are developing national cap and trade schemes (emissions trading systems with a limit for emissions), particularly the US, which may accept a relatively large amount of international forestry offsets from tropical developing countries. The US policy position is critical for defining what direction carbon trade and markets in general, and forest offsets in particular, will take after 2012.

The American Recovery and Reinvestment Act of 2009, commonly referred to as the US economic stimulus package, contains six separate acts to reinvigorate building. In addition, there are many stimulus packages to promote a better environment, simultaneously creating long- term employment and economic growth, commonly called the "Green New Deal." Wood energy is poised to benefit from renewable energy stimulus schemes.

Another important issue that changed the forest products industry in mid- 2009 was an amendment to the US Lacey Act, which addresses illegal logging and other illegal plant trade by: (a) prohibiting all trade in plant and plant products such as sawnwood, furniture and paper that are illegally sourced from any country; (b) requiring importers to declare the country of origin of harvest and species name of all plants and plant derived materials contained in their products; and (c) establishing penalties, including forfeiture of goods and vessels, fines, and imprisonment for those who knowingly violate the declaration requirements. The burden of proof is on the supplier to be able to substantiate legality, and other reporting requirements are quite detailed and will necessitate major changes in ways of doing business in or with the US.

Finally, companies' and trade associations' corporate responsibility (CSR) programs have become even more important during the economic crisis. With an oversupply of wood and paper products, buyers have a greater selection of suppliers, and shop not only based on price, but on many other attributes, including CSR. Environmental and social responsibility reporting is becoming commonplace among the largest international forest industry companies. What was once an annual environmental report has evolved to include social responsibility issues. Carbon footprint and climate change issues are other elements of the most progressive reports.

In summary, all sectors of the traditional US forest products industry continue to impacted by a deep global recession. Only when financial stability is restored to the US economy will the forest products sector improve. I project this to occur in early to mid- 2011. When the forest sector does rebound, it will look much different that the industry as we knew it pre- 2007. Until then companies will cut costs, close mills and explore alternative uses of wood

Dr. Vlosky is Director and Professor of Louisiana Forest Products Dwevelopment Center, LSU School of Renewable Natural Resources, Baton Rouge LA, and Crosby Land and Resources Professor, Forest Sector Business Development.

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