VARDAMAN VIRTUAL FORESTRY COMPANY

WHEN WILL THE PRICE OF PULPWOOD INCREASE?

For most of 2001 we have been asked to predict when pulpwood prices will increase.  We’ve always answered, “We don’t know.”  In fact, we always discharge any JMV&CO employee who predicts future price movements of any timber product.  The reason is that they are determined by national and international developments that we don’t have time or expertise to study.  Our job is hard enough when we predict what a sale will bring 30 days from now.

These future movements are important, however, so we always turn for help to Chuck Slaybaugh, Bank of America Analyst, in Charlotte, NC.  The Executive Summary of his 57-page “Pulp and Paper Quarterly” for June 2001 reads as follows:

“As expected, market pulp prices plummeted during the first and second quarters of this year, amid lower domestic shipment volume for nearly all pulp, paper and paperboard products.  Higher postal rates and energy costs, poor advertising markets, a strong U.S. Dollar, weak conditions in domestic manufacturing and the lack of wealth-effect related economic stimulus all factored in the decline, which has spared no sector, save retail tissue.  Through April, U.S. production of pulp, paper and paperboard has declined by 11%, 6% and 9%, respectively, though inventories have still risen in most grades.

“Market pulp prices have fallen by about $200 per metric ton (mt) from their cyclical highs of last Fall, with most transactions now below $500 per mt.  The abruptness of the decline is reminiscent of 1995 and 1991 and follows an upcycle of just 18 months.  The weakness of the Euro has shielded European producers from some of the pain, though they have been acquisitive on their shores and ours.  This year, U.S. advertising spending is projected to fall on an inflation-adjusted basis, after a 10% compounded rise over the last two years.  This is the major vexation of newsprint, coated paper and uncoated groundwood producers.  But abnormally-high European capacity growth in supercalendared and coated paper grades is disturbing as well.  With Europeans now three of the five largest North American coated paper companies, dumping complaints are unlikely and more price erosion and facility closures appear unavoidable.

“On a more positive note, sector equities have done well thus far this year, with investors shrugging off earnings warnings, bond ratings downgrades and slumping sales.  They appear convinced that recent supply management and cost cutting efforts are positioning the industry to fare better, once recovery in the sector begins.  We agree, but believe that substantive improvement is still at least one year away (emphasis ours).”