For legislators and the general public to understand Maine’s recent changes in the forest economy, they need to look at a global picture. Two significant factors are testing even the healthiest commodity-based businesses: The strong U.S. dollar is stifling exports and China’s economic downturn is softening markets. These two factors have triggered closures of some Maine paper mills that were operating in a highly competitive market.
Pulp and paper markets
The consolidation of paper-making capacity has been going on for the past decade. Newer and well-capitalized companies reinvested in their businesses and either became low-cost producers or shifted production into products with greater market potential. For example in Maine the newsprint production ended with the closure of the East Millinocket mill, while SAPPI’s Westbrook mill invested capital to start producing release paper, a high-demand product that adds texture to many products.
In the solid wood sawmill business, there has been a tremendous investment in installing the latest technology to increase productivity. The brand new Irving mill in Ashland is a world class facility. These improvements are predicated on a revived housing market. Although housing starts had been slower than expected, they climbed in November to 10.5% from a month earlier to a seasonally adjusted annual rate of 1.173 million, the Wall Street Journal reported Dec. 16. The exchange rate currently favors our Canadian lumber producers who compete for the same eastern U.S. markets.
Wood energy markets
Energy production using tree biomass is affected by the low cost of petroleum and natural gas. In 2014, three-fifths of Maine’s net electricity generation came from renewable energy resources, including 27 percent from biomass, according to a report from the U.S. Energy Information Administration. Most was either self-generated at paper mills or exported for power and renewable energy credit sales to other states. Landowners count on this market for low-grade wood, which helps thin the forests, and many Maine loggers are heavily invested in chipping equipment to supply this energy market and concerned with the volatile energy and REC (Renewable Energy Certificate) markets.
So how do global markets affect Maine?
The closures of pulp and paper mills in Millinocket, East Millinocket, Lincoln, Old Town, Bucksport and workforce reductions in Jay have theoretically represented a significant amount of wood over the years, but demand for some wood (hardwood species) has been high and much of the available capacity was absorbed by the remaining mills. This dynamic is illustrated by the fact that Maine is a net importer of pulpwood. In recent months about 1.5 million tons of wood has been displaced, representing about 10 percent of the wood consumed by Maine mills (2014 MFS Wood Processors Report). Some of this volume is wood biomass, but most was softwood pulpwood.
A 10 percent reduction in softwood pulpwood consumption in the short term could be a serious problem for the logging workforce, which regularly evaluates the investment in expensive equipment, while taking the risks of a volatile market. As with manufacturing facilities, this period will be a test of survival for many logging and trucking firms.
From a landowner perspective, changing species demands and decreased market prices will influence forest management options. For example, a landowner contemplating a harvest of hemlock logs may delay the operation until markets open up for the smaller sized hemlock pulpwood. Commercial forest landowners will continue to harvest their land, but entrepreneurs will need encouragement to build markets for low-grade softwood pulp (white pine, hemlock, spruce, fir.) Based on the historical resilience of the forest industry, these challenges will be turned into opportunities.
Companies with multiple locations throughout North America and, in some cases, the world, are evaluating their investments in Maine by the fundamental categories of cost that include: the cost of wood, energy, taxes and transportation, and the availability of a trained workforce. These issues were identified at MFPC’s Manufacturing Committee meeting in August and at the Maine Pulp and Paper Association conference in November.
As the Legislature convenes in 2016, we need to explain the dynamic challenges facing our industry and speak passionately about the sustainable opportunities create by Maine’s forest economy.