Unkind cuts ahead for sawmills

Expect more shakeout in the wood products industry, Potlatch CEO Mike Covey warned analysts during a conference call on Tuesday.

North American mills are geared up to produce 65 billion board feet of lumber – enough to build 2.2 million houses. With residential construction projected to fall by 20 percent next year, demand for lumber will continue to fall off sharply, and that will lead to more layoffs, Covey predicted.

“That’s dozens and dozens of sawmills that have to modify their output and that just takes time,” he told analysts.

Potlatch Corp. has closed one of its sawmills in Arkansas indefinitely, and laid off a shift at a second mill after prices for southern yellow pine dropped by 21 percent. Scattered mills around the Inland Northwest have also reduced shifts. Covey said cuts or shutdowns at other Potlatch operations are possible if the company can’t break even. In a related matter, Potlatch also plans reduce its log harvest by 5 percent to 10 percent.

The sawmill cutbacks come on the heels of four years of record demand for lumber, which led to increased production at U.S. and Canadian mills.

Potlatch’s third-quarter results reflected the turmoil in lumber markets. The company’s wood products sector lost more than $5 million during the quarter, after posting a profit during the same period last year.

However, higher prices for pulp and paperboard products helped cushion Potlatch’s overall results during the third quarter of this year. The Spokane-based company reported earnings of $24.2 million, or 62 cents per share, compared to 2005 third-quarter earnings of $11.1 million.

This year’s third-quarter results include a $9.2 million tax credit from a settlement with the Internal Revenue Service.

Potlatch converted to a real estate investment trust in January, which has dramatically lowered the company’s corporate tax bill. During the first nine months of the year, Potlatch posted earnings of $95 million, including a next tax benefit of $60.4 million.

In other news, Covey said that Potlatch expects to receive $40 million from the settlement of the long-running softwood lumber trade dispute between the United States and Canada. The company should receive the first installment before the end of the year, he said.

The money comes out of $5.3 billion in tariffs collected from Canadian lumber imports. Most of the tariff money is being returned to Canadian sawmills; however, $1 billion will remain in the United States.

Of that money, $500 million will be distributed to domestic mills; $450 million will be given to charitable causes, including Habitat for Humanity; and $50 million will pay for a marketing campaign promoting North American lumber.