U.S. Forest Products Industry -- Competitive Challenges in a Global Marketplace
There isn’t a day or a minute that goes by when a forest product isn’t part of our lives. The newspaper in the morning. The table where we eat our breakfast and the box that holds the cereal. The desks we work at and the paper in the copying machine. Our children’s school books. The beds we sleep in and the houses that shelter us.
Our industry makes the products America values while helping to preserve the environment. We understand better than anyone the important benefits of our nation’s forestlands and how to conserve them for the future. We have long been dedicated to producing our products in the most responsible manner possible by employing sustainable forestry practices, increasing the utilization of recovered fiber, meeting and exceeding environmental protection requirements, and providing well-paid, secure jobs in communities across the country.
Our Sustainable Forestry Initiative (SFI®) program is one of the world’s most progressive forest management standards, demonstrating our industry’s strong commitment to sustainability. AF&PA’s Environmental Health and Safety Program establishes our commitment to comprehensive principles of environmental protection and documents the industry’s continuous improvement on key environmental performance measures. Paper recycling has been a part of our industry for over 100 years, and recovered fiber now provides 38% of our domestic raw material supply. Today the industry is recovering over 50% of all paper consumed in the U.S. and we have committed to achieve a 55% recovery rate by 2012.
The importance of our industry is reflected not only in our record of environmental stewardship, but also in our contribution to America’s economic health and progress. The forest products industry is an integral part of the U.S. economy’s manufacturing base, employing 1.3 million people and ranking among the top ten manufacturing employers in 42 states. In over 150 counties in 30 states, the forest products industry provides more than 10% of total employment. We generate more than $230 billion in sales and rank eighth among domestic manufacturing sectors in contribution to GDP.
U.S. manufacturing is at the heart of a vibrant economy that has produced the highest living standards in the world. But today, manufacturing faces serious domestic and international challenges which, if not overcome, will lead to reduced economic growth and ultimately a decline in living standards for future generations of Americans. U.S. manufacturing has lost 2.3 million jobs since July 2000, and in the past five years manufacturing’s share of GDP has fallen from 15.4% to 12.7%. As the U.S. manufacturing base diminishes, manufacturing’s innovation process is deteriorating and the seedbed of our industrial strength and competitive edge may be irreparably damaged.
The forest products industry is no exception to the challenges facing U.S. manufacturing industries. Today, the U.S. forest products industry is facing serious threats to its continued viability. Since 1998, 98 paper mills and 142 wood products mills have permanently closed their doors, resulting in the loss of nearly 140,000 jobs. New capacity growth is now taking place in other countries, where forestry, labor and environmental practices are often not as responsible as those in the U.S. As a result of the competitive disadvantages faced by U.S. producers, jobs are being exported and domestic demand for our industry’s products is increasingly being met by producers in other nations who do not share our high standards and commitment to sustainability.
Recognizing the danger posed by our industry’s loss of competitiveness, the American Forest & Paper Association conducted an extensive study over the past year to identify the causes of this trend. Our research identified several major factors that compromise our industry’s ability to compete in both domestic and global markets, including
Availability of affordable, high quality fiber;
Cost of environmental regulation;
International trade practices;
Labor costs, especially healthcare costs;
Energy costs; and
Investment in technology.
Wood fiber is the single largest cost component for the forest products industry. The ability to compete globally in forest products manufacturing is predicated on a secure, affordable wood supply. Our nation’s forests contain approximately 15% of the world’s wood fiber supply and our standing timber inventory has continually increased since 1952. Overall growth exceeds harvest by a wide margin and is expected to do so for years to come; according to the U.S. Forest Service, the nation’s forest inventory will continue to increase through at least 2050. Forest plantations are a significant and growing factor in this equation. With over 32 million acres, the U.S. leads the world in area of planted forests.
Despite our abundant forest resources, wood fiber costs in the U.S. are among the highest in the world. In large part this is due to constraints on commercial forest management, which have caused harvests to decrease for the past decade. While the timberland base remains relatively stable, the land area actually available to produce wood fiber for industrial use is declining. Public lands contain over half of the softwood inventory, but currently contribute less than 12% of the annual harvest, and the national forests contribute less than 5%. The forest products industry controls 13% of U.S. timberland and supplies about 30% of the nation’s annual supply of commercial timber, but over the past five years the acreage owned by industrial users has fallen by over 25%. The burden of meeting the demand for fiber has increasingly fallen on the nearly 11 million non-industrial private landowners who produce 60% of the raw material used by the industry. But these individual and family owners have been discouraged from keeping their acreage in use as commercial timberland by environmental requirements, an unfavorable tax system, and cutbacks in state and federal incentives to reforest harvested land. In its Southern Forest Resource Assessment released in October 2002, the U.S. Forest Service found that the biggest threat to our nation’s forestland was not the forest products industry, but rather conversion to alternative use, and that policies which encourage forestry can help prevent urban sprawl from destroying America’s forest resources.
AF&PA recently commissioned a study on the issue of illegal logging and its effect on global forestry and trade patterns. According to the study, illegal activities including harvesting without authority in designated national parks or forest reserves; harvesting without or in excess of concession permit limits; failing to report harvesting activity to avoid royalty payments or taxes; and violating international trading agreements represent between 5% and 10% of global industrial roundwood production. The lower “cost” loggers pay for this material has a direct effect on product prices. The study estimates that illegal material depresses world prices of wood products by 7% to 16% on average, depending on the product and the market. In certain important markets such as China, illegal material significantly affects the ability of U.S. producers to compete.
Recovered fiber has become an increasingly important raw material for our industry and now constitutes 38% of the fiber used to make paper in the U.S. Over the past five years, consumption of recovered fiber has grown worldwide, but the growth has taken place in other consuming regions. Although the rate of recovery has increased significantly in this country, domestic consumption of recovered fiber has actually declined somewhat in recent years. Instead of utilizing this material in our own manufacturing processes, the U.S. has become the major supplier of recovered fiber to the world. U.S. exports increased 66% between 1998 and 2003. In contrast, the volume of recovered fiber exports from Western Europe is only 25% of ours, although their total supply volume is comparable. In 2003, 28% of all paper recovered in the U.S. was exported, with more than half of it going to supply new paper mills in the Far East.
Expanding export demand has put pressure on the available supply, especially of the more desirable grades, creating a supply shortage for domestic mills and forcing them to utilize lower quality grades. Producers of recycled paper are likely to face mounting problems with fiber availability and quality unless renewed efforts are made to increase diversion and recovery of high-quality paper from the waste stream and to invest in improved recycling capabilities.
The U.S. forest products industry has consistently demonstrated its commitment to environmental stewardship by meeting or exceeding regulatory requirements. As an industry, we work closely with regulators to ensure that standards are based on sound science. U.S. forest products producers spend a significant amount of capital on environmental protection. The pulp and paper industry, one of the most capital intensive sectors in the U.S., spends on average 15% of its total capital investment on environmental protection.
Producers in other major industrialized countries incur similar environmental capital costs, but producers in the developing world spend significantly less. Our research shows that capital expenditures for environmental protection are significantly higher in North America and Western Europe than in the developing countries, both on a per ton basis and as a percent of total capital expenditures. For example, capital expenditures per ton for environmental protection are only about 60% as high in Brazil and 40% as high in China as expenditures in the U.S.
Additional costs are imposed on the U.S. industry by this country’s compliance and enforcement system, which is characterized by extensive reporting requirements, frequent inspections, inflexible deadlines and associated fines and penalties. AF&PA has been working on research designed to quantify the effect of these costs on our industry’s global competitiveness and identify ways in which the system could be made less costly without sacrificing environmental performance. Although the research is not yet complete, preliminary results indicate that the system of environmental legislation and regulation is much more complex in the U.S. than in other producing countries. As in the case of capital costs, the administrative costs associated with environmental regulation are significantly higher in North America and Western Europe than in South America, Eastern Europe, and Asia.
The U.S. tax system discourages investment by the domestic forest products industry, while competing countries use their tax codes to foster the industry’s growth. In fact, our tax system poses greater obstacles to corporate timber production and paper manufacturing than that of any major competing country except Canada.
For non-corporate investment in forestland, estate tax laws force many inheritors of family-owned tree farms to either sell these properties for commercial development or to prematurely cut their trees to pay the tax bill.
Positive tax law changes enacted in 2001, 2003 and 2004 have reduced the international competitive disadvantage faced by the U.S. forest products industry, but we are still burdened with a higher effective tax rate higher than most of our competitors. We must continue to work for additional policy changes that would encourage investment in U.S. productive capacity and preservation of our privately-owned forest resources.
Unquestionably the most sweeping and significant development affecting the forest products industry since our last report has been the growth of international trade. Imports and exports now amount to nearly one-third of world forest products production. Demand growth and new capacity in developing countries have created a boom in international shipments of everything from sawlogs to recovered fiber, market pulp, printing-writing paper, lumber, composite panels and containerboard.
The industry’s globalization has had a major impact on U.S. producers. Since 1998, imports’ share of U.S. paper and paperboard consumption has risen steadily from 16% to 21%. Imports of pulp, paper and paperboard have gone up 23% while exports have fallen 12%. Imports of wood products have gone up 60% in the last decade and 23% in the past five years alone. Overall, the U.S. is now running a $15 billion trade deficit in pulp, paper, paperboard and wood products, a 60% change for the worse in just five years.
Unfortunately, this surge in imports and decline in exports came at a time of weak domestic demand. The combination resulted in a wrenching contraction of the U.S. industry. Widespread mill closures
have led to a 24% reduction in pulp and paper industry employment and a 15% reduction in lumber and wood products employment.
Traditionally, our industry’s international trade policy objective has been the expansion of overseas market access for our products through the elimination of tariff and non-tariff barriers. But in today’s global marketplace, bringing down tariffs is not enough. The U.S. is losing the fight for world markets, in many cases because the opponents are not playing by the same rules. We often find ourselves competing in our own markets with subsidized products, products from countries where exchange rates are not market-based, and products from countries whose governments do not enforce reasonable protection of the environment.
After fiber, labor is the second largest cost component for our industry. Along with Canada, the U.S. industry has by far the highest wage rates of any forest products producing region. On a fully loaded basis, operating personnel in U.S. pulp and paper mills make seven times as much as those in Eastern Europe and Latin America, three times as much as those in Asia, and 25% more than their counterparts in Western Europe. The U.S. also has the highest unit labor costs among competing countries, despite the fact that the productivity of American forest products workers measured in output per hour is among the best of all producing regions.
Of course, the forest products industry is not alone in dealing with high labor costs. For U.S. manufacturing as a whole, hourly compensation ranks second among competing countries, behind only Germany. To a large extent, the level of compensation reflects the costs of worker benefits, especially health care. Family health coverage in the pulp and paper industry averages $10,400 per employee per year, up from $6000 in 2000.
Health care in the U.S. is now a $1.5 trillion industry. According to OECD figures, the U.S. spends more heavily than almost any other nation in the world on health care both on a per-capita basis and as a percentage of GDP. But what is truly unique to the U.S. is the extent to which it relies on the private sector, especially business, as the primary provider of healthcare coverage. As a percentage of total expenditure on health care, the U.S. has the lowest public expenditure and by far the highest private expenditure among the reporting countries.
The high level of payroll taxes in the U.S. adds to the labor cost problem. Despite not having a national health care program for working-age people, the U.S. still ranks towards the upper end of the spectrum with respect to payroll taxes. In addition, manufacturers in the forest products industry, like the rest of the manufacturing sector, face a growing shortage of technically qualified candidates and an aging workforce, both of which are likely to add to total employment costs in the future.
Energy is a significant manufacturing cost component for the forest products industry, accounting for up to 15% of manufacturing costs. Since the beginning of the new millennium, energy costs have been climbing steadily in the U.S. Crude oil prices have increased from under $20 per barrel in the 1990’s to a record high of over $50 per barrel in 2004. But the steepest rise has been in natural gas prices,
which more than doubled in 2003 alone. Despite a worldwide shift form coal and oil to natural gas, natural gas prices have not increased elsewhere at the rapid rate seen in the U.S. The increase has had a direct impact on our industry, where 47% of the purchased energy is natural gas, 16% is electricity (much of it based on natural gas), 27% is coal and 10% is fuel oil. Of these energy sources, only coal has shown a relative price decline since 1998.
The increased cost of natural gas has had a significant impact on the forest products industry, which annually purchases some 400 billion cubic feet of natural gas, accounting 20% of its total energy consumption. The price escalation during 2003 alone is estimated to have directly cost our industry over $1 billion. The higher cost of natural gas has had additional indirect effects, raising the price of chemicals used in paper and wood products production and the cost of purchased electricity, which is increasingly based on natural gas as well.
During the past few years, the U.S. forest products industry has reduced its purchased energy usage by improving its overall energy efficiency and increasing its use of renewable energy as its major energy source. Despite these gains in efficiency, however, energy costs for U.S. manufacturers are now higher than their overseas competitors for most forest products. And according to forecasters, including the Department of Energy, prices of all types of fuel in this country will continue to rise for the foreseeable future. Until some major structural changes can be made in the U.S. energy supply picture, U.S. producers will need to focus on increasing the energy efficiency of their processes and invest in co-generation and biomass usage to decrease their reliance on purchased energy.
Investment and Technology
The combination of sluggish demand and record imports during the past five years resulted in widespread forest products mill closures. Across the country, 98 paper mills and 142 wood products mill closed their doors between1998 and 2003. And industry employment plummeted. The U.S. lumber industry lost 80,000 jobs, over 12% of its workforce, while paper mill employment declined by almost 60,000 jobs, over 25% of its workforce.
The closure of older facilities has not been accompanied by investment in new capacity in the U.S. High fiber, labor and energy costs, complex and lengthy permitting processes, a disproportionate tax burden, and competition from offshore producers with government assistance, have combined to discourage the industry from investing in the U.S. Instead, new capacity is being added in Europe, Latin America and Asia. These newly-built production facilities incorporate state of the art technology, helping to make their cost structure and their product quality extremely competitive. Without investment in new productive capacity, technology in the U.S. industry is falling behind, jeopardizing our ability to be internationally competitive in the future.
The U.S. forest products industry faces multiple challenges which together reduce its ability to compete in global markets. Some of these challenges, such as concern about the ongoing availability of wood and recovered fiber, are unique to our industry. But many are problems we share with other U.S. manufacturers, including escalating health care and energy costs, unfair competition in international trade, high corporate tax rates, and the burden of regulatory compliance. Our industry is committed to doing its part to meet these challenges, but successfully addressing them will require a partnership between industry, investors, and policymakers. By working together, we can create a climate in which the forest products industry can flourish and ensure that future generations will have the abundant forests, diverse wildlife, secure jobs and useful products that we enjoy today.
June 6, 2005