Mills reopen as home building lifts lumber business

• At least 14 lumber mills in the U.S. and Canada have reopened or plan to reopen
• Industry%27s improving fortunes show economic impact of housing recovery
• Rising building costs help push up new home prices

The Plum Creek Timber mill in Evergreen, Mont., is far removed from the housing recovery making headlines nationwide — but its fortunes are not.

After a four-year shutdown, the mill reopened in March thanks to rising lumber prices and a resurgence in home building.

The mill, which makes studs used to frame houses, now employs 30, half of its former workforce. It carries a $1.5 million annual payroll that'll roll through the local economy.

"It's a big deal to see this mill reopen," says Tom Ray, Plum Creek vice president.

The recovery of the housing market is benefiting many industries. But few are as directly tied to home building as wood products and timber.

With single-family housing starts up 23% last year — and forecast to rise 26% this year — demand for lumber is soaring and so are prices. That's fueled a reopening of some sawmills and shift expansions in others. Logging employment rose 3.5% last year, the first increase in 12 years, government data shows.

Housing construction — and the wealth effect that drives increased consumer spending as home prices rise — will contribute almost three-quarters of a percentage point to the economy's 2.1% growth this year, Moody's Analytics expects.

Housing is now growing faster than the overall economy. That's helping companies from home improvement retailers such as Home Depot to truck makers and furniture sellers. But a full 70% of U.S. lumber demand is driven by housing, including new construction and remodeling.

"The lumber industry lives and dies with housing," says Lynn Michaelis, former chief economist for Weyerhaeuser and now partner at consulting firm Forest Economic Advisors.

A HARD FALL

The housing downturn hit the wood products and timber industries hard.

At the height of the housing boom in 2005, consumption of U.S. lumber hit almost 65 billion board feet. It fell to about half that at the bottom of the market in 2010. Last year, it climbed back to 37.5 billion and will likely pass 40 billion this year, FEA estimates.

With rising demand, a few lumber mills are roaring back to life. Out of 146 North American lumber mills closed since 2008, 14 have reopened or announced plans to do so, says industry analyst Paul Jannke. Five are in the U.S., including the one in Evergreen, and others are in Alabama, Wyoming, Virginia and Colorado. The rest are in Canada.

Other mills are reopening, too, including those making plywood and oriented strand board, a plywood competitor.

This summer, Toronto's Norbord expects to reopen an OSB mill in Jefferson, Texas, that has been closed since 2009, the company says.

Rising prices are a big motivator. OSB prices are up 134% since the end of 2011, Jannke says. Framing lumber prices are up 64%, according to the composite index kept by the Random Lengths industry newsletter. Plywood prices are up 43%.

"Prices are strong enough that we can make a profit," says Gary Ervin, owner of Saratoga Forest Management. In January, it reopened a mill in Saratoga, Wyo., that makes studs used to frame houses. The mill had been closed for 10 years. It now employs 80.

None of the reopened mills are especially large, but neither are their communities. Saratoga, population 1,678, describes itself as a place "where the trout leap in Main Street."

Eighty jobs "is big for our area," says Saratoga Mayor John Zeiger.

Both Montana and Wyoming have benefited from strong energy industries. Still, the unemployment rate in Flathead County, where the Evergreen mill is located, was almost 10% in March.

Todd Schelling, 45, worked 19 years at the Plum Creek mill before it closed. To find employment in recent years, he headed to North Dakota's oil fields to drive a truck, spending weeks at a time away from his family.

He's now back at the Plum Creek mill, making more money as a saw sharpener than he did before he was laid off. He no longer fears the prospect of losing his home.

"This job has been a lifesaver," he says. "Financially, I was in a world of hurt."

PRESSURE ON HOME PRICES

Higher lumber costs are good for some companies, but they're bad news for home builders and shoppers.

Home construction costs are rising faster than the appraised values of homes, the National Association of Home Builders says. So, even if buyers think a house is worth what they're offering, they can't get bank financing if appraisals come in low.

In April, almost a third of builders reported losing a sale because an appraisal came in below production costs, the NAHB says.

Costs for other building materials, including gypsum and concrete, are also up but less than for oriented strand board and lumber, the NAHB says.

Lumber prices have edged off in recent weeks given big gains earlier. They're down 8% from mid-to-late April, the composite index shows.

Yet the long-term trend is still up, says Russell Taylor, president of the Canadian-based International Wood Markets Group.

Wood Markets predicts composite lumber prices will rise 9% next year after a 22% increase this year. In 2017, prices will beat the previous annual record set in 1997, it says.

Prices will be driven higher not only by more demand but also by global supply constraints, Taylor says.

Among other things, Russian log exports have dropped. The mountain pine beetle is decimating forests in British Columbia, and the Quebec government is reducing timber harvests in that province.

Meanwhile, it can take months to reopen mothballed mills, given wear and tear on idled equipment.

The industry was also a bit slow to react to signs of improvement. Given the depth of the housing industry downturn — and previous signs of an upturn that never arrived — industry executives were hesitant to reinvest.

"People were gun-shy," Michaelis says. "Now the housing numbers are strong enough to convince people that this is for real."