1997 was a very good year for the United States economy: GDP rose 3.8 percent; the unemployment rate dipped below 5 percent, consumer price inflation eased to just 1.7 percent; and the federal budget moved toward balance.
The Asian financial crisis did not have an appreciable impact on United States economic growth in 1997, but is expected to subtract approximately one-half percentage point from GDP growth in 1998. The main underlying cause for this impact will be a widening of the United States trade deficit.
The Federal Reserve Bank, which could have been expected to raise interest rates in view of the economy’s rapid expansion and tight labor markets, has adopted a neutral stance and may ultimately decide to lower rates if the Asian impact turns out to be more severe than is currently anticipated.
In sum, 1998 is likely to be a year of continued, albeit slower, United States economic growth, with GDP rising about 2.5 percent. A large part of the expected slowdown is likely to be the result of a rising United States trade deficit with Asia. However, labor shortages may also prove to be a significant impediment to the rapid expansion of economic activity.
Paper and paperboard production turned in a strong performance in 1997, rising 5.2 percent to 86.3 million tons &endash; more than twice the 2.5 percent average annual growth pace of the prior ten years. The robust gain reflected strong packaging and advertising markets, and the relative stability of customer inventories following significant destocking during the previous two years.
Trade expanded even more briskly than domestic consumption of paper and paperboard in 1997, extending a long-term pattern of increasing globalization. In particular, United States exports of paper, paperboard and converted products rose an estimated 8.1 percent in 1997 (892 679 tons) to 11.9 million tons, while imports climbed 10.5 percent (1.4 million tons) to 14.3 million tons. In the seven years since 1990, exports have expanded at a 9.8 percent average annual rate (5.7 million tons over seven years), while imports grew 2.7 percent a year (2.4 million tons). Domestic paper and paperboard demand, by comparison, rose at a 2.0 percent trend rate.
With trade growing more rapidly than domestic demand, the industry’s trade exposure ratio (imports plus exports as a percent of domestic paper and paperboard purchases) climbed from 21.0 percent in 1980 to 23.3 percent in 1990 and then reached 29.5 percent last year.
After edging lower in each of the three prior years, newsprint shipments rebounded 4.7 percent in 1997 to 6.6 million tons, a new record high. Shipments of newsprint from United States mills had previously declined from 6.5 million tons in 1992 to 6.3 million tons in 1996. United States shipments of newsprint to the domestic market advanced 6.0 percent in 1997, while exports weakened 2.9 percent. The rapid expansion of domestic newsprint demand reflected last year’s strong advertising environment which boosted newsprint consumption by daily newspapers an estimated 4.1 percent. United States mill inventories of newsprint declined 36 percent between late 1996 and the end of last year.
The printing-writing paper sector was characterized by strong demand growth in 1997, with domestic shipments rising 7.9 percent to 24.3 million tons. The advance reflected more favorable inventory patterns as well as gains in office workers employment and in print-based advertising activity. Magazine advertising pages increased 4.8 percent in 1997, more than reversing a 2 percent decline in 1996. Third class mail volume, a proxy for direct mail advertising, also rose briskly last year.
Shipments growth varied within the printing-writing grade structure last year, ranging from 18.5 percent and 10.1 percent for coated groundwood and coated free sheet, respectively, to 5.3 percent for uncoated free sheet and 2.0 percent for uncoated groundwood. Significant growth in imports, from Canada and other suppliers, boosted total domestic purchases of uncoated groundwood by 9.0 percent in 1997.
Tissue paper production climbed 2.2 percent in 1997 to 5.8 million tons, after rising just 0.9 percent in 1996. Trend growth averaged 1.4 percent a year in the seven year period from 1990 through 1997.
Containerboard production rose 5.5 percent in 1997 to 32 million tons in response to strong domestic and export demand. Box shipments, the principal driving force behind domestic containerboard consumption, rose 3.3 percent last year, following a 0.6 percent decline in 1995 and a 1.4 percent increase in 1996. Building on a 35 percent advance in 1996, containerboard production for export increased another 18 percent in 1997. Containerboard inventories at mills and box plants were trimmed by 161,000 tons in 1997, which reduced weeks of supply from 5.1 at the end of 1996 to 4.8.
Boxboard production &endash; including recycled, unbleached and bleached kraft &endash; advanced 3.8 percent in 1997 to 13.56 million tons, more than offsetting a 0.9 percent decline in 1996. Last year’s increase was paced by a 23 percent gain in export-related production of boxboard. Export demand was particularly strong with respect to bleached and unbleached kraft folding boxboard.
Folding boxboard production for domestic use remained virtually flat from 1996 to 1997 at 5.8 million tons, while milk carton and food service board for domestic use edged up 1.2 percent. "Other boxboard," which includes tube, can and drum stock as well as gypsum wallboard, rose 3.8 percent last year.
United States shipments of chemical paper grade market pulp rose 3.8 percent in 1997 to 7.9 million tons. The overall advance reflected an 18.7 percent increase in shipments to domestic customers and a 2.2 percent decline in exports. Exports of chemical paper grade market pulp to Europe and Latin America increased in 1997, while export to Asia declined.
Continuing a long string of uninterrupted gains, recovery of paper and paperboard rose 5.0 percent in 1997 to 40.8 million tons. The overall advance reflected a 7.3 percent increase in recovered paper consumption by United States mills and a flat performance on the part of exports.
While recovery rose briskly last year, so did apparent consumption of paper and paperboard, leaving the recovery rate virtually unchanged at just above 45 percent. However, the utilization rate -- recovered paper consumption at United States mills as a percent of paper and paperboard production -- rose to 37.6 percent in 1997 from 36.9 percent in 1996.
Capacity growth will range below historical norms for most grades of paper and paperboard during the next three years, according to AF&PA’s 38th annual Capacity Survey issued in December 1997. The Survey indicates that total paper and paperboard capacity will expand at an average annual rate of 1.2 percent from 1998 through 2000, less than half the 2.5 percent rate registered during the previous ten years. Chemical paper grade market wood pulp capacity is slated to increase at an average rate of 0.5 percent in the 1998-2000 period.
The United States paper industry’s recovery from the inventory-induced slowdown of 1995-96 is expected to continue in 1998. However, the pace of advance will inevitably slow from that of 1997, which was a year of catch-up growth.
In 1998, United States consumption of paper and paperboard can be expected to rise in line with the United States economy &endash; by about 2.5 percent. Production growth will be strongly influenced by trade &endash;i.e. by exports and imports of pulp, paper, and paperboard. It remains to be seen whether Asian instability will hurt the United States paper industry’s trade balance in a major way.
The United States lumber and wood products industry benefited in 1997 from strong construction activity. The primary driver for wood products demand is new housing which surpassed 1.4 million units. The consensus forecast for 1998 suggests only a modest reduction. High consumer confidence, low unemployment and lower interest rates have contributed to a healthy housing sector. In addition to new housing, other construction activity was, and continues to remain, very strong. This includes remodeling and non-residential construction.
Strong construction activity resulted record consumption of softwood lumber. Consumption totaled 120 million m3, about 2 million m3 higher than the previous record set in 1987. At the same time, imports accounted for 35 percent of United States softwood lumber demand. Ten years ago, imports accounted for just 29 percent of the market. The difference in large part reflects the reduction in milling capacity in the western United States following the curtailment of timber harvests from public lands. Whereas public lands used to supply upwards of 20 percent of the timber used to produce lumber and plywood, they now account for 8 percent or less.
Demand for structural panels has been strong as well. North American capacity has grown dramatically over the past two years (by nearly 5 million m3). This has resulted in tremendous competition that, in combination with high logs costs in some areas, has forced some mill shut-downs. Most of the increased capacity has come on line in Canada and, consequently, imports into the United States have grown. Over 80 percent of Canadian production is shipped into the United States Imports of structural panels (primarily OSB) were estimated at 4.7 million m3 last year and are likely to grow by 5 percent or more this year. OSB has become the predominant sheathing material used for housing, replacing softwood plywood. Market share for OSB in North America has grown from 25 percent in 1988 to 56 percent in 1997. Total demand for structural panels in 1997 was estimated at 27.5 million m3.
While statistics on the hardwood lumber industry are more difficult to report, furniture manufacturers have been reporting excellent sales of wood furniture. Strong housing construction and new home sales spurs furniture purchases, so the outlook for the hardwood industry is quite favorable despite some expected contraction in exports to the Pacific Rim.
Weakness in the Asian economies pushed United States wood exports lower during 1997, but mostly in volume. The value of United States exports remained steady at about $7.2 billion, off just 1 percent compared with 1996. Increased exports to Europe offset much of the decline in exports to the Pacific Rim. Exports to Japan, Korea, China and southeast Asia will remain weak in 1998, but should start showing signs of recovery later in the year as financial markets in those countries begin to stabilize. In the meantime, wood producers such as Indonesia and Malaysia will be exporting higher volumes of plywood and other products as a result of devalued currencies that have lowered prices substantially.
In the near term, wet weather has caused some problems for producers in the eastern United States and put upward pressure on log costs. In contrast, on the west coast, weak Asian markets have diverted logs to domestic mills, so most mills are reporting plentiful log supplies. The number of operating mills in the region has declined dramatically, however, because of the reduction in timber supply from public land.
A reauthorization of the Endangered Species Act (ESA) is currently being considered by the United States congress with bi-partisan support. The bill tightens some of the requirements for listing species as threatened and endangered so is being supported by the United States industry. The ESA has had a dramatic impact on the management of both public and private lands.
In the meantime, AF&PA’s Sustainable Forestry Initiative (SFI) continues to garner support and endorsement by conservation groups and others. The SFI establishes performance standards for AF&PA members for managing and procuring timber for company mills. During the first two years of the program, nearly one million hectares of harvested lands were regenerated. In addition, AF&PA members contributed $114 million to forestry, wildlife and biodiversity research projects. The association is carefully monitoring developments on certification and other sustainable forestry programs to ensure that they do not result in trade-distorting practices. AF&PA has been involved with developing a reference document to apply an ISO 14001 environmental management system to forestry operations.
On the international front, the United States forest products industry’s primary objective is a successful conclusion to the trade liberalization initiative being negotiated in the Asia Pacific Economic Cooperation forum (APEC). In November 1997, APEC Trade Ministers met in Vancouver and designated forest products &endash; wood and paper products &endash; among nine priority sectors for early trade liberalization.
The Ministers endorsed a proposal cosponsored by the United States, Canada, Indonesia and New Zealand to eliminate most tariffs on wood products by 2002, with few exception by 2004, and most paper tariffs by 2000, with some minor exception to 2002. They further instructed trade negotiators to reach an agreement on the details by June 1998.
AF&PA, and our colleagues in the Canadian, Indonesian and New Zealand forest products industries have been actively involved in pursuing agreement on early tariff elimination in APEC. Getting an agreement on early elimination of tariffs on trade in forest products should serve as a model for European and industries in other world regions to support tariff elimination in the WTO as a means of creating a truly global marketplace for forest products.
