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In the past 15 months, forest products companies operating in Arkansas have announced at least $309 million in improvements to sawmills in the state, in addition to a $10 million investment to restart a machine to paper at Ashdown.
What’s behind this wave of announced sawmill updates and expansions? Historically high wood prices.
“It’s the crazy market we’ve had for two or three years now, roller coaster prices that have generated unprecedented profits in the sawmill industry,” said Steve Anthony, president of Anthony Timberlands Inc. of Bearden. (Ouachita County).
“There have been some 4 billion board feet of ads in the southern United States over the past year,” said Matthew Pelkki, George Clippert Chair of Forestry at the College of Forestry, d Agriculture and Natural Resources from the University of Arkansas at Monticello. “There’s a lot of activity going on, not just in Arkansas. Louisiana, Mississippi and Alabama have all seen major factory announcements. A lot of it is about grabbing lumber prices.
“The Southern Pine Mills have been doing very, very well for two and a half years,” he said.
But Pelkki also noted that logging companies had considered some of these projects for several years and that the easing of the COVID-19 pandemic allowed them to continue.
The pandemic has certainly fueled the timber price roller coaster. The March 2020 shutdowns and expectations of a recession prompted sawmills to reduce production. But then a home improvement boom inflated demand for lumber. Added to this is an increase in demand for housing, with the residential construction industry being the first to emerge from the recession caused by the pandemic.
On February 20, 2020, before the effects of the pandemic began to be felt in the United States in March, the price of lumber was $463 per thousand board feet. It fell to $296.50 on March 30, 2020, then climbed to $1,495 on May 12, 2021, plunged to $470.90 on August 16, 2021, to recover to $1,233.70 on January 19 of this year.
The price has since softened, with lumber trading at $552.80 per thousand board feet on August 9, a price that nevertheless remains above the $333.20 to $426.20 range of the lumber. pre-pandemic year of 2019.
As Pelkki noted of lumber prices, “Even in their steep declines, they are still well above what we would consider normal, which is 2019 prices.”
PotlatchDeltic Corp. of Spokane, Washington, which announced this spring that it was spending $131 million to expand and modernize its sawmill in Waldo, Columbia County, said Arkansas Business last week that the project “reflects our belief that the long-term backdrop for housing fundamentals remains supportive of new housing construction, repair and renovation. This is supported by a housing shortage, millennials in their best home-buying years, and an aging housing stock in the United States.
- Here are some of the announced sawmill upgrades, although this list may not be exhaustive:
- On June 6, PotlatchDeltic announced its $131 million investment in Waldo, increasing the mill’s annual capacity from 190 million board feet of lumber to approximately 275 million board feet. “The investment will also significantly reduce plant operating costs,” said a company press release.
PotlatchDeltic, which owns three sawmills and nearly 950,000 acres of forest land in Arkansas, said the expansion is expected to create 55 indirect jobs. The investment in the Waldo mill includes log yard and planer upgrades, a new saw line and a new continuous kiln. PotlatchDeltic said the existing plant will continue to operate during the project and is expected to be completed by the end of 2024.
- Canfor Corp. of Vancouver, Canada, announced on April 21 that it would invest approximately $130 million to modernize and expand its sawmill and planer mill in Urbana (Union County). The company said the investment will take advantage of the abundant supply of high-quality fibers to manufacture high-value products, increase the facility’s annual production by 115 million board feet and reduce the cost structure of installation. “The investment aligns with Canfor’s growth and diversification strategy to keep pace with growing customer demand,” the company said.
- Resolute Forest Products Inc. of Montreal announced on December 6 that it would invest more than $20 million in its sawmill in El Dorado and $8.4 million in its plant in Glenwood (Pike County). Resolute purchased the sawmills, along with one in Cross City, Florida, in 2020 from Conifex Timber Inc. The total purchase price was $163 million, plus working capital, which Resolute estimated at $13 million of dollars.
Resolute said the El Dorado mill will produce up to 180 million board feet of lumber and specialty products. The investment in Glenwood will allow the mill to increase its production capacity to 185 million board feet of lumber and decking.
- Anthony Timberlands said on May 19, 2021 that it is investing $10 million to upgrade its pine sawmill in Malvern over the next six to eight months.
- And last week, Anthony said his company was investing an additional $10 million in its Bearden facility.
- Domtar Corp. of Fort Mill, South Carolina, announced on July 15, 2021 that it would spend $10 million to restart a paper machine at its Ashdown plant to meet growing demand.
- And on May 24, Astara Capital Partners LLC of New York announced that it had formed Camden Timbers LLC to purchase and restart the Victory Lumber LLC sawmill in Camden. The press release gave no estimate of the cost of the investment.
Signs of softening
In June, housing starts fell to their lowest level in nine months, at a seasonally adjusted annual rate of 1.559 million units, and rising mortgage rates appear to have cooled what had been a housing market burning. If the United States slips into a recession, the plans announced by forest products companies could change.
“I can guarantee you that all of these companies are going to be watching what the Fed is doing,” Pelkki said. “What happens if we plunge into a recession in 2023? That could put a damper on all of that.
But despite what could slow demand, Pelkki, for his part, believes in the “seriousness” of forest products companies in announcing their upgrades and expansions. “These companies want to grow,” he said. “But the reality is that if we hit a recession and the housing market dips, that will put continued downward pressure on the lumber market.
“On the other hand, … we’ve underbuilt new homes over the last decade,” Pelkki said. “This demand for housing is not going away. While they talk about falling home sales, cooling off, we’re still pretty hot. A home currently stays on the market less than 60 days on average. And a normal market is considered six months.
The recent drop in lumber prices will have no effect on Waldo’s upgrade plans, a PotlatchDeltic spokesperson said. “We used a conservative seven-year average lumber price in our financial analysis, and we expect the project to result in an increase in EBITDA. [earnings before income tax, depreciation, depletion and amortization] $25-30 million per year and an IRR of 22% [internal rate of return] in our base case,” the spokesperson said.
Anthony of Anthony Timberlands said that generally the forest products industry has been profitable since 2013 after the Great Recession. “But 2019 was the second worst year in our company’s history,” he said. “In 2020, when the pandemic started, it looked horrible – coming off the second worst year in our history, and now we have a pandemic.
“Of course, people laid off shifts in anticipation of a depression, and the exact opposite happened. The last two or three years have been the two or three most profitable in our history” , said Anthony.
“And people are spending $200 million building new sawmills and $120 million upgrading existing sawmills, and that just seems crazy unless you think the more recent history is more the norm of this what we can expect in the future.”
Pelkki said, “Inflation or not, I think we’re going to continue to see good timber prices.”