by Brent Sohngen (Sohngen.1@osu.edu)
This article goes into more detail about the economic factors driving outcomes in the forest sector, and in particular, the pulp and paper industry in North America. As with my last post, this piece considers the case of a pulp and paper mill that is soon to shutter in Chillicothe, Ohio. The scenario there, while in many ways unique because of the types of paper the mill produced, also shares many traits with what is happening more broadly in the wood processing sector.
I imagine it is never an easy decision to shut down a factory. Politicians often make it out to be the nefarious work of owners bent on squeezing everything they can out of workers, local communities, and suppliers before escaping in the middle of the night, their pockets lined with millions, or billions, in profits. But it’s never that simple.
When a factory closes, costs decline, but so do revenues. Capital is left behind, along with the good will of a community and well-trained employees. Usually for clear economic reasons, owners conclude that continued investments in the factory will not payoff. In some cases, closing may result from rising input costs, while in other cases it may happen when the products the factory makes are no longer demanded.
Such appears to be the case in Chillicothe, Ohio, where Pixelle Specialty Solution is shutting a large, long-established, pulp and paper mill. This mill produced carbonless paper and other specialty products. The carbonless paper market has been declining as an increasing share of transactions go online. Pixelle moved other product lines from this plant to other plants they own.
Why not repurpose the mill for other products? Ohio has a decent stock of trees, but growth has been slowing as its forests age. Trees are mostly mixed hardwoods, which can be fine for certain types of pulp, but pulpwood is most economically obtained from clear cuts, especially those in wood plantations where uniformity lowers costs. Larger trees make their way into 2x4s while smaller trees and tree parts are shifted to pulp and similar lower value uses. Profits are made on the larger trees.
Clear cuts are not super common in Ohio where owners prefer selection cuts. If they cut anything, just the largest, most valuable trees are taken, with smaller ones, tops, and branches often left behind. Without care, and good forestry, this approach may lead to high grading, which contributes to slower forest growth rates. Ohio does not have a strong timber growing and harvesting base in comparison to other regions in the US and the world, so any new mill would need to import pulp.
Pulp imports could come from other parts of the United States. The US has long had an advantage when it comes to trees. In the second half of the twentieth century, old growth forests in the Pacific Northwest provided a key strategic asset, followed by second, third, and fourth generation pine plantations in the Southern US.
Pine in the US grows plenty fast, but the US growth advantage has eroded over the years as industrious foresters have figured out how to grow eucalyptus and pine plantations faster in Brazil. Yes, rainforest is falling to make way for cattle and soybeans, but the Brazilian wood products industry has planted over 10 million hectares of fast-growing non-indigenous species on old farmland and savannas to feed its iron (heat from charcoal) and wood product industries.
Because wood pulp is easily transported, it can be made cheaply in Brazil and shipped to the United States or China. Not surprisingly, Brazil is now one of the world’s largest exporters, and their exports are growing (Figure 1).
Figure 1: Pulp exports from the US and Brazil (UN Food and Agricultural Organization, FAOSTAT database).
For US paper companies, it’s a big hurdle to overcome the substantial boost that lower labor and energy costs provide in Brazil, alongside ultra-fast forest growth rates. Even if energy costs can be driven down here, US companies will still have a tough time competing in this global market because of trends in labor costs.
A recent report by BTG-Pactual finds that the key problem holding US paper manufacturers back is the high cost of producing pulp. Their analysis illustrates that pulp costs are roughly 40% higher in the United States than in Latin America.
Figure 2 illustrates US cost trends for five inputs used to produce paper: trees (timber price), manufacturing wages, interest on bonds, electricity, and natural gas. From 2000 to the present, wages and electricity prices increased, while natural gas, interest rates and timber input prices declined.
Although many costs trended downward this century, since 2020, costs of most inputs have risen. This most recent trend weighs heavily on wood product manufacturers in the US.
Figure 2: Input and output price trends. Data sources: Timber prices from Timber-Mart South; Wages, AAA bonds, and pulp, paper and allied product prices from St. Louis Federal Reserve; Electricity and natural gas prices from Energy Information Administration.
High costs for labor – a key problem facing paper manufacturing in the United States – is not an unfamiliar story for most industries. With high labor costs, companies must rely on technological or other advantages to maintain a competitive advantage.
Today, there is talk of using tariffs to compensate for this competitive disadvantage, however, imposing tariffs is a bit like swimming upstream. Even if tariffs help to keep pulp and paper mills afloat for a few years longer, only lower wages (or higher wages in the competing country) or better technology with fewer labor inputs will resolve the competitive disadvantages in the long run. There is a risk with tariffs too. They raise prices and increase the pace of substitution
Big new investments in US pulp and paper, or forest industries more generally, will only be made when longer term prospects turn positive. One of those “positives” is the price of paper material, which has increased in the last couple decades, almost in lock step with wages (Figure 2).
These rising prices reflect declining capacity in the United States and Europe over the last 5 – 10 years combined with growing demand for shipping containers and boxes. This demand increase was global in nature, with rising economic growth and trade across the globe in the twenty-first century. The movement to e-commerce also elevated demand for boxes.
Undoubtedly, these demand factors have kept some factories in the US open longer than otherwise. For the last decade or so, businesses have been able to compensate for higher wages with better prices. Eventually, however, the strong uptick in several costs proved terminal for factories like the one in Chillicothe.
One thing the US has going for it is its land-base, which is capable of producing well over 500 million m3 of timber sustainably each year – a number 40% greater than we currently produce. With rising competition from Brazil and other places with potential for fast-growing forests, moving to this level of wood harvesting in the US will require both new demand and new investments in technology and people. These investments will have to happen both in forests and factories.
Could we see movement to this level of harvesting and investment in the US? I’ll turn to that question in the next post.