Wood Chip Demand Fell Off a Cliff: What Now?
By John K. Kelley, Steve Courtney, and Roy Anderson
The Pacific Northwest forest products industry’s economic performance sometimes resembles a crude logging road. Things get stuck; roadbeds wash out; rain, snow, ice and other natural obstacles can require major action to overcome.
The demise of many Pacific Northwest pulp and paper mills has become one of those obstacles for the region’s sawmills and whole log chip producers. A long-term decline in demand and the optimization of wood fiber production and manufacturing in other parts of the world have led to a significant reduction in pulp and paper production in the Pacific Northwest.
Lumber trim ends, slabs, and edgings are all by-products of sawmilling that are converted into wood chips. A rough measure is that for every thousand board feet of lumber produced, about 0.4 bone dry tons of chips result. This means that the 9 to 10 billion board feet of annual lumber production in Oregon and Washington over the last decade translates into about 4 million bone dry tons of annual sawmill chip production. As shown in Figure 1, sawmill chip production (the solid line) has held steady while chip demand (the dotted line) has declined. Pulp and paper producers are the main consumers of wood chips in the Pacific Northwest. A steady string of closures among pulp and paper producers has translated into a 50% decline in chip demand from 2005 to 2023. Pacific Northwest wood chip demand first dove off a cliff during the Great Recession; it never recovered afterwards, and much later it fell off another post-pandemic cliff.
Given the preceding trends, the economic principle of supply and demand means that chip producers aren’t getting paid as much for chips and other mill residuals today as they did in the past—if they can find a buyer at all. This is a major problem because lumber mills depend upon that extra revenue stream. Also, most sawmills do not have the space to store chips that quickly accumulate when chip demand weakens. For sawmills to remain profitable during periods of either constrained or zero mill residual chip demand, lumber prices will need to rise.
These circumstances are even worse for whole log chipping operations. They produce chips directly from small diameter roundwood stems. Their chips tend to be higher quality (more consistently sized) than mill residual chips. They can also produce chips during periods when sawmill production is weak. However, they are also considerably more expensive to produce than mill residual chips. This means that when chip demand drops, whole log chip production is generally the first supply source to be cut off. For whole log chippers, the current circumstances look grim.
Who benefits? Chip consumers, predominantly the remaining pulp and paper manufacturers in the Pacific Northwest, should almost be able to name their chip prices—at least for a time. As previously stated, mill residual chip supply is fairly steady. Thus, the key driver in the current chip supply and demand imbalance is declining chip demand from pulp and paper manufacturers.
Another important element is distance to market. The farther wood chips must travel to market, the more expensive they are to the buyer and the lower their value to the chip producer. For example, there are no pulp and paper mills in California. The sawmills there have very low values for their wood chips. It’s not an accident that most paper mills choose very strategic locations with steady access to mill residuals and whole log chip shipments.
Despite the current depressed conditions, there is some hope for chip and residual producers. Announcements of new chip consuming facilities from Drax, Roseburg Forest Products, and others will help buoy demand. Also, other companies are exploring new technologies to utilize wood chips in the Pacific Northwest. However, all of the new projects are either just starting construction, or are in various stages of planning. None of the new opportunities will increase chip demand in the short term.
With the suppressed demand expected to continue for the foreseeable future, chip producers and consumers might well ask what all it means—and as importantly, how they can navigate this demand reduction to their best advantage. That’s where BECK consultants come in. Is there a sawmill evaluating new options for utilizing chips? We can help assess the available technologies. Is there a pulp and paper mill operator wondering about opportunities? We can help identify where those opportunities might be optimal. What should a whole log chipper do to diversify its operations? We’ve got ideas. When should the trend change? We’ll do our best to forecast a reasonable probability based on the evidence.
Reach out to us at email@example.com to learn more—and to get help steering your enterprise through the ruts in the logging road!