Overdue Reality Check

I am not a masochist, so it gives me no pleasure to be in the hardwood business right now. However, I am an optimist, so I am choosing to look at the positives that are derivable from the current plight the industry finds itself in. 

             I can remember blindly enjoying the early 2000’s when housing was trending in a delightfully northeasterly path, China was ratcheting up their engagement in hardwood buying and wet weather was tempering supply favoring hardwood producers by spiking lumber prices. We relished in our good fortune. I say blindly because the reality of that situation was that the furniture industry was in the midst of a battle for its manufacturing life in the US, which it would ultimately lose. The housing boom was blowing a bubble that would ultimately burst calamitously, and the natural relationship between log and lumber prices was being eroded into an ultimately catastrophic attempt at each operating independent of one another.

             The realities that set in post 2006 were harsh. The housing bubble did not sustain itself and in fact would require a more drastic correction than had occurred in the last 50 years devastating industries that were dependent on construction activities, i.e. hardwood lumber. China became the largest user of North American hardwoods, and a dependence was being formed that was admittedly necessary but also heavily one-sided. And log prices escalated, despite lumber markets, closing the gap on sawmill margin expectations.

             Did we learn anything that we could apply to change our fortunes the next time we inevitably faced such a series of circumstances? I am sure we did, but unfortunately our individual ability to change course within the fragmentation of this industry is minimal. So, as economies corrected and markets picked back up against the backdrop of severely depleted supply, we focused on the benefits. Prices ran back up, log prices that didn’t quite adjust as much as lumber prices did, were never forced to; and, in fact were bolstered by a surge in export log merchandising. It seems that in this industry we are constantly looking ahead but with a memory that only recalls the best of times, profit hides a lot of problems. If 4/4 fas1f red oak hit $1800/M, then it will again. This selective recollection is probably natural, and certainly feeds on this industry’s past thinking that the market will adjust and ultimately take care of producers. Trends do change and sometimes will play into the way markets are moving. I can remember when an increase in soft maple and decrease in red oak specie comp in the woods was looked at as a disaster, not so much anymore, huh?

             Back to today’s reality check, the circumstances we face are similar; the economy is good, housing is generally stable with a slant toward improvement, China is still the dominant market for grade hardwood lumber, log and lumber struggle to have a reasonable relationship. But, circumstances are also different; low grade and industrial hardwood products are the strongest they have ever been and are rivaling grade lumber for the largest percentage of hardwood product sales, log prices have actually begun to fall with the same magnitude that lumber prices have, and our markets have a multitude of design options that aren’t or don’t require wood.

             How do we use lessons of the past to better approach our future? Looking at the circumstances we face now, it is likely that grade lumber could become the by-product for some producers that are set up to focus on industrial timber production. China’s dominance as a consumer of oak and cherry has likely set those products on a path to commoditization similar to poplar, so no reason to assume a grand price resurgence is eminent, best to adapt raw material costs to current pricing. And unfortunately, our industry is shrinking. Customer segments in our industry are shrinking which ultimately will force contraction in lumber production capacity. Competitive wood substitutes are stealing market share, and that is a reality. If we aren’t going to start making these competitive products ourselves, our best defense is to out promote these products. The message of the hardwood industry is one that should play well. It is rural communities that value hard work and making a living to support families with a natural product that has little environmental impact.

             Unfortunately, we in this industry seem to be the only ones that recognize just how great a story we actually have. As individual companies that can seem daunting, but collectively as an industry spread over as much of the country as we are, we could easily convey the true message about hardwood products. We have some good, well intentioned advocates working for us, but even they are fragmented, so our money as members of this industry is divested over multiple representative organizations and diluted in its impact in furthering the message about our products. 

             Each company in this industry is going to have to find the answers for how to survive in the current environment. There isn’t one answer for how to deal with the influences that are impacting the hardwood business. Too often, we want to solve the industry’s problems but in reality we really only need to solve our own company’s problems with regards to the circumstances we are facing and that will ultimately create a healthier hardwood industry with successful businesses that will be able to promote and strengthen the industry as a whole. We must be businessmen who work in the hardwood industry rather than simply lumbermen. Don’t misunderstand me, I love being a part of this specific industry and have appreciated the career it has provided and the relationships I have formed being a part of this industry. But, if we are honest, we too often neglect the business side of our operations choosing to make excuses for why the lumber business requires us to do things that make no sense to other business people.

Collins recently shut down the sawmill portion of the Richwood, WV operation. The sawmill profitability was burdened by commodity pricing for oak and cherry, too little other products and log costs that were simply too high to be profitable. All the circumstances described previously. The decision to close any part of an operation and impact people is hard. But, being in business means adapting and changing or else closing completely. Richwood continues to operate the lumber yard and kilns at Richwood. This is not an original or radical new idea, but it is a departure from simply continuing to do the same thing hoping for different results. Every company in this industry is facing such decisions right now. What do we do differently? How do we stay relevant? How do we survive? 

             I respectfully suggest remaining open to a radical new look for your business that may not be what you thought it would be. Be willing to adapt and adjust. Be firm and resolute in controlling your costs and maintaining a margin in your products. Be open to a collective marketing and promotions program for this industry. Embrace the new realities not because they are better but because they are reality!