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Domestic Demands

Pulp and Paper Sector

Hardwood and softwood pulpwood make up 42 percent of the timber consumed in the South. The region’s paper mills are concentrated in a few areas in which plentiful water is available. These areas include southeastern Georgia, northeastern Florida, and southern Alabama and Mississippi. Concentration of paper production capacity organizes the demand for pulpwood within the South—demand for pulpwood is strongest in the vicinity of mills and weakens with distance from the mill gate (fig. 9). While satellite chipmills distributed the demand for pulpwood over more of the region during the 1990s, pulpwood markets are still much more concentrated geographically than markets for solid wood products.

Raw material utilized for production of paper products consists of pulpwood and pulpwood residuals from other wood product manufacturing. The utilization of recycled fiber has become increasingly important in the production of paper products. Ince (2000) shows that recycled material comprised 23.9 percent of total fiber used in the U.S. paper sector in 1985 to 37.9 percent in 1998. This has resulted in a relative drop in the demand for virgin wood fiber. He also finds strong indications that the amount of recycled material used in U.S. paper manufacture has perhaps reached a maximum, especially given strong export demand for recovered paper. So it is likely that expanding use of recycled material mitigated demand and price increases during the rapid growth phase but that changes in demand for recycled material have not been a major influence in the adjustment phase.

Pulping capacity within the region defines the upper limit of the demand for pulpwood. Because capacity expansion requires an enormous commitment of capital (construction of a typical paper mill costs approximately $2 billion), trends in capacity provide a strong indicator of current and anticipated demands for pulpwood within the region. In this section, we examine dynamics in pulping capacity and the implications for derived demand for pulpwood in the region.

For several decades, the United States has produced more wood pulp than any other nation. Through 1998, total U.S. pulpmill capacity, and the share of U.S. pulpmill capacity located in the South, trended upward (fig. 10). Since 1998, U.S. pulping capacity has declined slightly while southern capacity had dropped by about 16 percent by 2003 (fig. 11). These declines in domestic capacity occurred as other countries expanded their capacity. For example, Sweden, Finland, Chile, and Brazil increased their capacity between 1995 and 2002 (fig.. 12 and fig. 13). While the United States and the South continue to lead the world in pulpwood production, their share of worldwide capacity has declined since 1991. By 2003, Southern U.S. pulp capacity had approximately returned to its 1985 level.

New pulpmill capacity and pulp production is feeding increased worldwide demand for paper products, especially in Asia. With level to declining capacity in the United States, it is clear that new capacity is being developed in other countries. There is no evidence of expansionary activity in pulp and paper manufacturing in the Southern United States. These changes are likely explained by shifts in comparative advantage relative to several factors, including labor costs, raw materials costs, and proximity to final product markets.

Manufacturing costs in kraft linerboard mills in the United States and abroad (fig. 14) provide an example of differences in comparative advantage. The U.S. South is competitive in this market compared to the U.S. West, Canada, and Europe, but lags behind Latin American countries (primarily Brazil and Chile) in its cost structure. Fiber and labor costs are significantly higher in more industrialized countries than in South America. The U.S. South retains comparative advantage because of its proximity to U.S. demand centers, i.e., because of lower transportation costs, but labor and wood input cost differentials make Latin American producers viable competitors.

In 1995, 1999, and 2004, both Brazilian and Chilean producers could deliver both coniferous and nonconiferous (mostly eucalyptus) pulpwood to mills at substantially lower cost than could producers in the U.S. South (fig. 15 and fig. 16). In 2004, delivered fiber costs were 24 and 27 percent less in Brazil and Chile, respectively, for coniferous pulpwood, and were 21 and 27 percent less for nonconiferous pulpwood. Price differentials are not static, however, and prices in Brazil and Chile have risen since 1999, relative to those found in the Southern United States. The comparative advantage held by these nations would decrease if this trend were to continue.

Solid Wood Sector

The large majority of the solid wood produced in the region goes into lumber and panel products. Panel products and lumber utilize about 46 percent of fiber products generated in the South. The region’s lumber mills, unlike its pulp and paper mills, are widely dispersed (fig. 17).

Unlike southern pulpwood capacity, southern softwood sawmill capacity has not declined. Softwood sawmill capacity remained stable or increased slightly between 2000 and 2003 (fig. 18), even as capacity in the Western United States declined. Comparable data are not available for hardwood lumber capacity in the South, but sustained production and prices generally do not signal declines in capacity.

Southern panel capacity expanded significantly in the 1990s (fig. 19). Southern pine plywood, which dominated panel production through the 1970s, peaked in the 1990s and has since declined. Capacity for producing OSB and medium-density fiberboard grew strongly through the 1990s. More recent data indicate that although southern panel production has remained stable, OSB production has continued to grow (fig. 20). Expanding OSB capacity coupled with declining plywood capacity indicates increasing demand for less expensive, small-diameter timber, especially compared to demand for the veneer logs used in plywood production.