Steve Zika, CEO of Hampton Lumber, discusses the effect of trade tariffs and how to manage downturns.
The lumber sector is a tough, cyclical business. Sawmills regularly shut down. Pricing and supply of logs are volatile. Lumber companies and environmental groups continue to spar over logging. Navigating the sector is Steve Zika, CEO of Hampton Lumber, a 75-year-old, family-owned wood products company, which owns several sawmills in the Pacific Northwest.
Zika discusses how the company survives economic downturns and why he is optimistic about the mass timber building sector.
This interview has been edited for length and clarity.
What has helped you weather industry downturns?
It has been a “survivor” type of business. One of the reasons I believe we have survived is because of our diversified business model. We own about 140,000 acres of timber in Oregon and Washington. We have sawmills in rural areas of Oregon, Washington and British Columbia.
One of the other parts of the business that is unique is that we are vertically integrated. We have a wholesale division. We sell our own lumber products but also sell other peoples’ lumber products. We import products from Asia and we export a lot of finished products to markets around the world.
Having that diversity and vertical integration helps. A lot of people who only have sawmills and not a lot of other assets to fall back on aren’t around still.
What is the biggest challenge facing the lumber industry in the Pacific Northwest?
The sawmill business, which is the driver of our business, primarily revolves around timber supply. Timber supply will always be the biggest challenge. Roughly 65% to 75% of our costs are for logs.
In Oregon and Washington, there is a certain amount of environmental activism; some of the non-forestry groups that were successful in shutting the federal forests down continue to look for opportunities to reduce harvest on state and private timberlands through additional regulation.
We are trying to do outreach in terms of engaging with the community, talking about our forest practices, talking about the value of wood products versus building with steel and concrete.
How have your workforce needs changed?
You have the challenge of convincing people that working in a sawmill is not like the old-fashioned days when it was all men who were very strong and they lifted big piles of lumber and logs. That is not the workforce we need going forward.
We need a diverse workforce. We need people with good attitudes and innovative ideas. There has been a lot of innovation and investment in technology to get the maximum value out of every log. If you are paying a lot for logs, which you do in the Pacific Northwest versus other parts of the country, you have to make sure you are using all of the log, and that you are getting products and maximum sales value out of every log.
How do you best manage price volatility in the lumber market?
Last year we saw lumber prices go from a record high in June to falling 50% in a couple of months. Even though there has been an increase in homebuilding since the Great Recession, we are still not at the levels of single-family homebuilding that are considered normal.
How we deal with volatility is we have long-term customer relationships with national home centers — Home Depot, Lowe’s. That part of the business — consumer repair and remodeling — has stayed strong. That has allowed our sawmills to continue operating at normal production levels.
We also export a lot of finished lumber products, and that has allowed us to work through volatility. The fact we do wholesale beyond marketing our own products has allowed us to get a bigger presence in the market than smaller companies.
How has the trade war with China affected you?
One positive effect is that during the Great Recession, China imported a lot of logs from all around the world. They stepped up log exports out of the Pacific Northwest back in 2010 or 2011. It got to the point where we were struggling to find enough logs for our sawmills because so many logs were exported to China.
In the last couple of years, with China’s slowing economy and additional tariffs, the export of logs has slowed. That has had a small benefit to sawmills in the Pacific Northwest.
From a negative standpoint, we export lumber to China. That part of the business has slowed down. At one time it was 15% of our business. Now it is down to 3% to 4%. That lumber, which used to go to China, is going into the U.S. market. That has had a negative effect on pricing.
The last negative effect is the steel and aluminum prices going up dramatically after the tariffs that the Trump administration put on China. We buy a lot of operating supplies that use steel. But overall, it hasn’t had a gigantic effect on our business.
How have the trade tariffs on imports of lumber affected you?
The Trump administration put a 20% tariff on all lumber coming into the U.S. That tariff had a positive effect on lumber prices in the U.S. because it tends to keep some lumber products out of the U.S. It almost puts a floor under lumber prices.
But what a lot of people don’t realize is that we import 30% to 35% of lumber used in the U.S. from Canada and South America and other places because we shut down the federal forests. There is not a lot of negotiation in that trade battle, but that could evolve in a year or two.
What are the best growth opportunities in the lumber sector?
People are starting to understand that using local wood products is a really good answer from an environmental and sustainable standpoint. For many years in Europe, they have been building a lot of structures out of wood, not just houses.
We did a study that shows you can design a 40-story building out of wood that has structural integrity and performs better seismically than steel and concrete.
With labor shortages in the construction industry, people are figuring out the economic and environmental advantages of building with premade panels out of wood versus on job sites where it takes a long time to get buildings constructed.
Do you see potential for more forest collaboratives, which bring together diverse groups to manage forestland?
I do see opportunity. Some forest collaboratives have good success, others not so much. Where it has worked, there are strong local groups and a federal district manager with the Forest Service who is supportive. People in Oregon appreciate the collaborative approach.
They do need some more funding. The wildfire response council [an initiative set up in 2019 to review wildfire prevention] is trying to work up practical solutions. The federal government has some new tools that can speed up some projects. We have to get beyond the old dialogue about timber wars and old growth. It is not about old growth anymore; it is about forest health.
What are the growth opportunities in the bioenergy segment?
That area has some opportunity. We did a feasibility study a few years ago at our Tillamook mill where we have a biomass boiler that creates steam to dry lumber. We have enough steam capacity to put in a co-generation facility for 20 MW. It would have been an expensive project — $25 million.
We were prepared to make the investment. But the economics didn’t work at the time. The reason they didn’t is because we have relatively cheap power from BPA and our hydro-system. The rates you could get from selling a power contract were not very attractive.
As the power rates go up — which they will as people want more renewable energy — there will be an opportunity. But until those rates change, we couldn’t make a reasonable return on that $25 million investment.
What about the market for wood pellets?
There are several companies looking at pellet plants. There is big demand in Asia for pellets to generate power. You will see more industrial pellet facilities here in the next five or 10 years.
How will the lumber sector look in the next decade?
You will see more cross-laminated timber facilities. There are a lot of people looking at it. We have had three to four parties talk to us about it. It takes a long time for these new markets to evolve, partly because of building codes.
One thing that is still being evaluated is where those facilities should be. We would like to see them in rural areas because they need the employment. But maybe they need to be closer to the market.
To subscribe to Oregon Business, click here.