The Changing Economics of the Pacific Northwest Forest Products Industry

Abstract

W E FEEL that those underlying economics which are key elements governing the earnings trends for the major owners and converters of timber in the Pacific Northwest have changed appreciably in the past couple of years in a manner which favors such companies. Furthermore, the direction and pace of this change is likely to continue recent trends. Because of these changes, we feel that major owners of timberlands and manufacturers of wood products have improved earnings prospects which will command higher earnings multiples. The long-run demand for wood fiber in all of its forms is felt to be very attractive as a result of rising world-wide usage of paper and paper products, plus the shelter demands that are extant throughout the world. The United States, Canada, and Scandinavia represent the three major wood resource centers of the free world. Russia has a large, and apparently untapped, forest resource, but to date they have not chosen to export wood or converted wood products in any appreciable volume. That factor could change in the future, but so far the major wood deficit countries of the world have been relying on North America and Scandinavia for their wood fiber. The Scandinavians are reported to be moving gradually toward maximum utilization of their forest resource on a long-range basis, which shifts the world's demand increasingly toward North America. The major private and public owners of timber in the United States have operated under the sustained yield principle of forestry for a number of years, and in fact the companies have undoubtedly been growing more timber than they have been removing during this time span. More recent scientific measurements of the amount of timber available and its rate of growth have indicated to some companies, notably Weyerhaeuser, that a significantly larger amount of wood could be removed from fee timberlands while still hewing to the sustained yield principle. At some point out ahead, perhaps in ten or fifteen years, it is expected that the supply/demand trend lines for old-growth timber will cross, and that the Pacific Northwest will go to what is called a second growth timber economy. In Canada, and particularly in British Columbia, vast new areas of timberlands have been opened up by the governments involved in order to stimulate economic growth and increase exports of converted wood products in all forms. With the bulk of the timberlands in Canada controlled by national or provincial governments, companies operate under various types of licenses or rights to use and remove the timber, again usually on some type of sustained use basis. The opening up of the interior of British Columbia has now pretty well run its course, and most of the major timber awards have been consummated. In addition, many of the pulp and paper mills scheduled to use these wood resources have been constructed or are under way. Thus, in the course of the next ten years or so, we should witness optimum utilization of the resources of North America on a sustained yield basis. The most tangible evidence of the improvement in the supply/demand patterns for wood has been the startling appetite for wood in its various forms which the Japanese have evidenced. It is estimated that possibly two billion of the 14-15 billion board feet of logs removed from Pacific Northwest timberlands in 1967 ended up in Japan. The Japanese have been heavy buyers of JOHN R. FLANAGAN is a partner on the research staff of Stein Roe & Farnham, Investment Counsel, in Chicago.