COLUMBIA FALLS n Plum Creek Timber Co. announced the latest in a string of shift reductions Thursday, as a sluggish national real estate economy continues to reduce demand for wood products.
The cutbacks come at a time when Plum Creek is “seriously considering some consolidation” of its Montana operations, said Hank Ricklefs, vice president for the company’s northern resources and manufacturing division.
In response, the company announced Thursday it would cut the number of shifts from four to three at its medium-density fiberboard plant, located in Columbia Falls. The cutbacks affect some 35 workers, or about one-fifth of the MDF plant’s 185 employees.
Ricklefs said those to be laid off on Sept. 29 will be encouraged to apply for jobs at other Plum Creek facilities in the Flathead Valley, but the future of those plants remains uncertain, as well.
“This is a tough, tough market,” said company president and CEO Rick Holley. “I’m an optimist, and I can usually see a light in the darkness. But I look down that tunnel today, and it’s just black. I can’t see any light.”
Until recently, Ricklefs said, there were a few bright spots, particularly at the MDF plant. Medium-density fiberboard is used for molding and doors and furniture, among other things, but not generally for new home construction. As such, it seemed to withstand the national housing crisis far longer than, say, plywood.
“But now we’re caught in the late-cycle effect,” Ricklefs said, “and we have to try to come to grips with that. We can’t run 24 hours per day, seven days per week. We can’t fill it up.”
And although Ricklefs said “it seemed to happen very quickly,” the company’s annual reports suggest the market has been constricting for some time, perhaps since as early as 2005.
Plum Creek’s manufacturing division lost $9 million during the first fiscal quarter of 2008, Holley said, and continued to lose ground during the second quarter. That after a lackluster 2007, when Plum Creek earnings were down $35 million from the year before.
And it could have been much worse in 2007, without a late-year sale of 100,000 acres in Wisconsin.
Land sales, in fact, have propped up company profits in recent years, but now even that sector is struggling, and Plum Creek has recently pulled real estate listings rather than sell at today’s depressed prices.
With the exception of a large conservation deal to sell 320,000 acres into public ownership, “our land sales in Montana have come to a screeching halt,” Holley said. After several years of red-hot real estate, he said, “we’re selling maybe a couple lots per month. It’s really slow.“
Both problems n the downturn in lumber demand and the flagging real estate sales n can be tracked to the same root cause, Holley said: “A flat housing market.”
So far, the company’s response to that sagging market has been to whittle away at the number of shifts at each plant n from three, to two, to one and a half.
But at some point, Holley said, it no longer makes sense to operate two similar facilities at half production.
“We may have to consolidate,” he said, suggesting that sawmills in Pablo and Columbia Falls could be combined, and likewise facilities in Fortine and Evergreen.
The company, with 1,400 workers in Montana, operates 10 manufacturing facilities in the Northwest, several of which duplicate services.
Ricklefs said combining operations would displace some workers, but he hoped to retain as many full-time employees as possible by laying off temps and allowing positions to remain vacant as workers quit or retire.
“You don’t do things like this lightly,” Ricklefs said of any possible consolidation, “but at some point you have to start looking at alternatives that maintain the jobs you have.”
Holley predicted that his company “will have to seriously think about consolidation” unless markets improve dramatically by the first quarter of 2009. And he, for one, is not betting on a turnaround that soon, instead banking on a stronger housing market by 2010.
That sounds about right to Paul Polzin, economist at the Missoula-based Bureau of Business and Economic Research. “We should be into a new construction cycle by 2010,” Polzin said, “with somewhere up around 1.6 million new homes being built.”
In a move aimed at hastening the rebound, the federal government recently took over lending giant Fannie Mae, which had been hit hard by foreclosures and sub-prime mortgage liability.
The takeover, officials said, was intended to boost investor confidence, and this week the first signs emerged that it might be working. Investors, who had been wary of loaning Fannie Mae money to finance mortgages, rallied after the takeover announcement and helped the mortgage lender to raise $7 billion in a bond offering Wednesday.
The loan to Fannie Mae came at favorable rates, which translates into lower rates for homeowners. Within a day of the bond offering, interest rates on a 30-year fixed mortgage had dropped by nearly a half percentage point, and some banks were loaning money at well under 6 percent.
That’s exactly the sort of news Holley has been looking for n lower rates and federal backing mean more loans approved, which means more homes purchased, which reduces the real estate backlog, which increases demand for new home construction, which means more need for lumber and other building materials.
Currently, Ricklefs said, the nation is sitting on about 11 months of backlogged housing inventory. Sell that down to five months, though, “and it’s like a lightbulb. It just turns back on.”
That flipping of the switch n combined with a scaling back of Canadian lumber imports as mills there exhaust bug-killed timber n could result in a sharp industry rebound, Holley said, “where you’ll see mills come back, or, more importantly, you won’t see mills shutting down.”
But Polzin warns the housing crisis represents only a short-term hurdle for lumber producers. “The long-term problem,” he said, “is on the supply side, with the decline in federal timber.”
If that log-supply issue is not addressed, he said, more mills are sure to be shuttered.
So far, Ricklefs said, Plum Creek has resisted consolidation and shutdowns by doing exactly what it did Thursday n reducing shifts during tough times. The cutbacks at the MDF plant, he said, “will allow us to operate more efficiently until the market improves and we are then able to step up production.“
And it is hoped, Polzin said, the work force won’t have moved on by that time.
“That’s always been the problem,” the economist said. “When you lose your work force, then you have a real shortage of workers when it comes time to start up again.”
Polzin said that, in general, $1 in wood products’ wages creates another dollar elsewhere in the marketplace, and warned the MDF cutbacks will surely have impacts far beyond Plum Creek.
“As you reduce earnings,” he predicted, “you’ll definitely see an equivalent loss in the broader economy.”
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