Technological Advancements for Weyerhaeuser Commodities Market Article Review Write a 3-4 pages double space article about the Technological advancements f
Technological Advancements for Weyerhaeuser Commodities Market Article Review Write a 3-4 pages double space article about the Technological advancements for Weyerhaeuser. Weyerhaeuser – Challenges in the Commodities Market
Frederick Weyerhaeuser started this timber company in the year 1900 by purchasing
900,000 acres in Washington state (History, 2019). The core value of innovation was
evident from the beginning, with examples of the company leading the way in fire
protection, sustainability, vertical integration and reforestation. These trends carried the
company through time and eventually landed them as the largest private landowner in
the United States, with their most recent merger with Plum Creek Timberlands that
catapulted their land holdings to over 12 million acres in the United States. Along with
these acres of industrial timberland, comes Weyerhaeuser’s manufacturing facilities,
which primarily consists of engineered lumber, oriented strand board and traditional
lumber mills. In an era of increased market pressure, flat housing starts, and political
challenges it remains to be seen if their core values and economies of scale will allow
them to continue to lead in the international forest products community (Energy.Gov,
2019).
Industry Overview
Historically, the forest products industry has been at the mercy of the national needs
and trends throughout time. Some of the early uses for these products were for
steamships, airplanes, and railroad lines (History, 2019). As the nation evolved and
developed, the major uses turned to paper, hygienic products and building materials
(Energy.Gov, 2019).
Given the diverse array of forest products being manufactured in this industry,
businesses of all levels of scope have developed within the various segments of the
supply chain. As shown in Figure 1 in the Appendix, Weyerhaeuser is one of the largest
producers of forest, paper and packaging products in the US. These mass produced,
widely used items are considered commodities, and companies like Weyerhaeuser and
International Paper compete by focusing on cost leadership.
Although these commodity markets, like lumber and oriented strand board are some of
the largest and most visible product lines in the industry, plenty of smaller companies
compete from a differentiation platform. This includes the production of small batch,
sometimes made to order, speciality type products such as birds eye maple pens,
Gibson guitars, and baseball bats. A list of materials being produced in this industry is
shown in Figure 2 of the Appendix.
Some of the major competitors in the commodities sector gravitate their operations
towards the location of the raw material, which in the case of the United States is
predominantly in the southeast, pacific northwest and New England (Forest Service,
2014). Depending on the structure of these companies, they might vertically integrate,
as is the case with Weyerhaeuser. In these circumstances, companies will purchase
and control the land their raw material is being grown upon, as well as the mills that
produce the end products. Weyerhaeuser also integrated to include their in house sales
staff and distribution centers to accompany their wood products.
Those companies that do not own company timberland will often engage in stumpage
contracts or lease agreements with various landowers. These contracts provide a
steady supply of timber for their mill operations, but does not allow them to control the
cost of the raw material, as well as the timing and type of harvest being utilized.
Similar to trends seen in other industries, mergers and acquisitions have consolidated
many of the industrial timberlands in the U.S. These mergers are often spurred by the
desire to gain economies of scale, via the adjacency of the landbases, as well as the
ability to reduce the number of competitors in the industry.
Another major trend, and issue, is the increased operating costs plaguing the industry.
Both the logging operations and the mills associated with this industry have seen a
change in their cost structures. In the early ages of this industry, the most common
means of producing timber was the use of a labor force, large hand saws, and in some
cases horse drawn sleighs. Although these methods were applicable to their era, and
cost effective, society eventually began to innovate and show concern about people’s
safety. This resulted in logging crews that now run numerous pieces of heavy
equipment, with a sticker price ranging from $200,000 to $750,000 per machine
(Dodson et al, 2015) (WY Q1, 2018).
Although this new era of machines led to increased production, the mill delivered rates
for the raw material being produced with these machines has not kept up with the
increased operating costs. This gap is putting a major strain on the industry, as loggers
are either being forced out of business or deciding not to enter the market altogether
(Dodson et al, 2015).
Outside Pressures
Environmental Regulation
Being that the forest products industry is very broad, there is no shortage of regulatory
mandates and pressures that Weyerhaeuser and others in this industry need to abide
by. The magnitude of the regulation determines its impact on their operating costs.
These regulations include increased monitoring and higher standards for effluent and air
pollutants from mill sites, anti- herbicide laws that prevent or hinder reforestation
activities and expensive additions to logging and hauling equipment that reduces their
pollution levels (EPA, 2004).
All of these examples lead to increased operating costs, and as mentioned above, these
regulations can impact all levels of the supply chain. For instance, the anti-herbicide
laws will impact the manner in which forsestland is reproduced. Without the option for
aerial site prep activities, the sites will be less productive in the future growing years,
and hence less profitable. That example exists for the business segment poised with
growing and harvesting the raw material, while the effluent standards impact the mills
that turn that timber into the finished product.
The aforementioned examples all have a broad impact across the business, but the
regulations do not stop there. Each geographical operating unit will be subject to the
local mandates and norms that govern that local industry. These include state specific
best management practices and federal regulations that protect local threatened and
endangered species (MI BMP, 2018).
Increased environmental standards applicable to subcontractors in this industry are also
leading to increased operating costs, that inevitably make an impact on Weyerhaeuser’s
supply chain. A common example being the recent mandates to over the road trucks
that requires them to reduce their emissions. This is accomplished by purchasing and
utilizing a fuel additive, which can costs thousands of dollars per year, above their
normal operating costs (Don Murray, 2018). These higher operating costs get handed
down to companies like Weyerhaeuser that are hiring these trucking services.
Weather cycles
Recent extreme weather events have proved problematic for Weyerhaeusers national
operations. These events also impact numerous sectors of their business, with wildfires
in the west destroying a distribution center, and tropical storms in the south flooding saw
mills and timberlands.
These environmental pressures can be unpredictable and have an impact on operating
budgets and forecasting throughout the organization. Increased downtime from the saw
mill example in particular can lead to decreased market share for that specific product.
The holding costs associated with unused inventory will also negatively impact their
profit margins, along with the opportunity for the raw material or finished product to spoil
without being able to reach the kiln in time.
Housing Market
Being that Weyerhaeuser wood products business makes up for over half of their
EBITDA, their profitability depends greatly on the demand for those products (WY Q1,
2018). The majority of their timber products, such as lumber and oriented strand board
are utilized in residential home construction, which places their demand at the mercy of
the greater housing market.
This poses an issue for forest products manufactures like Weyerhaeuser because the
number of housing starts has been flat in recent years, following the recession. This
trend is shown in Figure 3 of the Appendix. The type of housing starts is also a point of
concern. This is on account of a lack of single family homes being built, which require
the most timber products for construction. Instead, builders are either remodeling or
building condo type units, which require less building materials overall. Having this very
elastic demand associated with housing starts impacts their sales directly, and makes it
difficult to plan for future inventory and production levels (Alderman, 2017) (Simpson,
2019).
Global Relations and Tariffs
With $129 million in sales revenue from export markets in Q1 alone, Weyerhaeuser
depends on the health of the global relations and economy for their export markets (WY
Q1, 2018). With some of their major buyers being from Japan, China, and Korea, the
recent volatility with global trade regulations has led to increased operating costs in this
business sector (Simpson, 2019).
The sales have been steady but the operating costs associated with keeping those
relations sound has become increasingly difficult. A specific example exists on the east
coast, in West Virginia. The exports from these markets are being forced to go above
and beyond in terms of contractual agreements including fumigation of the loads
destined to Asia. These practices can be costly in that it requires longer inventory
holding times on the ships poised with transporting those materials overseas (Interview,
2018). Figure 4 of the Appendix shows an overview of the major destinations associated
with Weyerhaeusers export markets.
Political Pressures
The forest products industry has a history of attracting negative attention and feedback
from the public, and this trend continues today, with increased oversight from public,
non-profit groups that dislike or distrust natural resource management.
The sheer size and scope of Weyerhaeusers operations opens them up to criticism
from groups across the country. Specific examples include migratory habitat regulations
for deer in Maine and Michigan, habitat for the Gopher Frog in Louisiana, and increased
public outcry surrounding herbicide use in the west. All of these examples increase
operating costs in those respective regions by time incurred hosting and attending
public meetings, legal fees associated with pending lawsuits, and lost time for the
operations in these geographical regions (Vogue, 2018).
Weyerhaeuser and others in the industry also spend a great deal of time and capital
with public outreach, in hopes of mitigating the negative perceptions that surround the
industry. This effort includes increasing visibility to the public via social media platforms,
increasing community involvement of the staff, sponsoring non-profit and charity events,
as well as continually training and mentoring staff to ensure compliance in the various
sectors of the business.
Internal Pressures
Increased operating costs
As mentioned above, increased operating costs are plaguing the entire industry and
Weyerhauser is a victim of this effect as well. Much of the increases are being
witnessed on the operations side of Weyerhaeusers business, particularly with their
timberlands units. The prices associated with the machinery used across
Weyerhaeuser’s national ownership has skyrocketed in recent years, and well above
inflation (Dodson et al, 2015).
Another factor leading to higher operating costs of for the raw material is the increase in
insurance rates, for policies that are required in order to operate in this industry. These
prices are historically high for this industry already, on account of the inherent danger of
working in the woods amongst heavy machinery.
All of these factors impact Weyerhaeusers ability to profit from their timberlands, as the
increased prices witnesses by the contractors producing the timber gets passed down
on the machine and tonnage rates that Weyerhaeuser must pay to retain a consistent
contractor workforce.
Another business unit where Weyerhaeuser has faced increasing costs is with the
trucking and distribution of their materials. Fuel and labor shortages have increased the
costs associated with hauling their products. This phenomenon is being noticed
nationally, and in some cases across business functions. For instance, hauling rates
associated with getting the raw material from the woods to the mill has also gone up in
recent years.
Workforce shortage
These increased operating costs have a secondary, yet equally as troubling effect on
Weyerhaeuser’s operations, which was a decrease in the amount of new entrants to the
market, particularly in forestry operations. This is on account of the increased operating
costs and slim profit margins being noticed around the country. Another factor was the
inability for new entrants to gain financial backing, when a pair of machinery needed to
start a business could cost upwards of $1.2 million. This shortage of loggers and
truckers in the forestry sector places a financial and operational burden upon
Weyerhaeuser in that they must pay more for the producers they do have, and they
must spend a great deal of time trying to attract outside contractors (Dodson et al,
2015).
Weyerhaeuser is also witnessing a near term vacuum when looking at the
demographics of their workforce, all the way from its operations to the CEOs and board
members running the company. This increased turnover on account of retirements is
already happening in some regions of the country, and at a time when the job market for
young professionals is heating up, therefore increasing the competition associated with
recruiting young talent (Scott Henker, 2019).
Labor Unions
In certain areas of the country, most notably the export shipping yards in Washington
and Oregon, Weyerhaeuser faces ongoing challenges regarding the union poised with
running the operations out of those yards. The International Longshoremens
Association negotiates high rates for their employees and, under certain circumstances,
can bring the operations of those woodyards to a grinding halt. This relationship creates
increased operating costs and operational complexities when managing those
woodyards. It is not uncommon for the union to slow down the process of loading a
ship, which can become a significant financial burden as well as a hassle when planning
inbound and outbound deliveries (Brian Hamilton, 2018).
In some cases, the Weyerhaeuser personnel that manage the non-unionized portion of
the yard will have to visit the union hall in order to lobby for laborers for the day. This
approach places a great deal of uncertainty when planning the day to day activities of
those export yards (Brian Hamilton, 2018).
Major Product Recall
In 2017, one of Weyerhaeusers signature timber products, the TJI Joist, underwent a
recall. This was on account of the proprietary fireproof coating that lines the outside of
the joist, with the intention of reducing the need for gypsum ceilings or other fireproofing
methods in new home construction. Although this coating served its function, it was also
emitting a formaldehyde gas into the homes where the joists were used. The joist recall
spanned numerous housing markets across the country, with roughly 2000 homes
being impacted. The ensuing recall involved either removing the joists from the
impacted homes or removing the coating from the faulty joists. These methods, along
with the class action lawsuit that resulted from it cost the company over $60 million
(Weyerhaeuser Company, 2017).
Technological Advancements
https://www.weyerhaeuser.com/woodproducts/ Wood products> Software> discuss a
few of the items listed
Also discuss drone use in forestry applications- online sources available
https://www.3log.com/news_release/weyerhaeuser-has-selected-3logs-lims-for-raft/
https://www.3log.com/products/loaderwiz/
Literature Cited
http://investor.weyerhaeuser.com/2017-07-18-Weyerhaeuser-issuesstatement-regarding-TJI-R-Joists-with-Flak-Jacket-R-Protection
Don Murray interview- 2018 – enviro
Scott Henker – timberlands VP – interview 2019
Jim Thomson – Export Manager Olympia , WA – interview 2018
Brian Hamilton Interview- 2018
https://www.fs.fed.us/research/highlights/highlights_display.php?in_high_id=128
8 Housing starts – alderman
http://investor.weyerhaeuser.com/quarterly-and-annual-results – housing market
portion
https://www.cnn.com/2018/11/27/politics/supreme-court-dusky-gopherfrog/index.html political pressure section Vogue 2018
https://www.michigan.gov/documents/dnr/IC4011_SustainableSoilAndWaterQualit
yPracticesOnForestLand_268417_7.pdf enviro issues portion
History. Weyerhaeuser, 10 Mar. 2019,
https://www.weyerhaeuser.com/company/history/#0.
Forest Products Industry Profile. US Department of Energy, 10 Mar. 2019,
https://www.energy.gov/eere/amo/forest-products-industry-profile.
https://www.srs.fs.usda.gov/pubs/gtr/gtr_srs204.pdf
https://seekingalpha.com/article/4231497-plunging-prices-chronic-oversupplytrade-tensions-weyerhaeuser-tough-time
Appendix
https://www.statista.com/statistics/252705/total-us-industrial-roundwood-importsand-exports-since-2001/
https://www.statista.com/statistics/252974/leading-us-forest-paper-andpackaging-companies-based-on-revenue/
Figure 1. Major forest products producers and their respective revenue in US
dollars.
Figure 2. NAICS codes associated with outputs from the forest products industry.
Figure 3. Trends in the number of housing permits being applied for.
https://seekingalpha.com/article/4188268-new-housing-starts-permits-fall-juneactivity-plateaus
Figure 4. The major destination of export logs from Weyerhaeusers operations.
Source: Weyerhaeuser western timberlands tour 2018
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