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Tracking Alaska's timber: Seward sawmill may be key to new timber industry growth.

A very expensive state-of-the-art sawmill sits idle in Seward, lacking an operator with the knowledge and capital to make it work. All dressed up and nowhere to go.

The Alaska timber industry, hemmed in by a variety of land restrictions and export rules, is running out of room to grow despite healthy prices for both logs and manufactured products. Places to go but no way to get there.

These two -- the mill and the industry -- need each other, but bringing them together is not nearly as simple as it sounds. While the pressures of supply and demand may make Alaska's forests a logical source of timber in a global marketplace, the market is splintered into many segments, and the road to profitability is rocky and winding.

The industry itself is a complex machine with many large and small moving parts. Timber owners, loggers, mill operators and brokers operate like so many cogs and gears, sometimes grinding uneasily against one another, against the marketplace and government agencies. The diminishing timber supply in the Pacific Northwest is putting enormous pressure on every part of the industry, yet each responds to such pressure in different ways.

A Case In Point

Chugach Alaska Corp., one of Alaska's 12 Native regional corporations, envisioned being a major timber player when it built the Seward mill at a cost of about $30 million. Hoping to draw on its own large tree supply as well as timber from other sources, the mill operated from May 1990 to September 1991. Then it became shrouded in the cloud of bankruptcy that enveloped the whole corporation.

Although the mill had secured overseas customers for its chips and started penetrating the Southcentral Alaska market with milled lumber, some observers say the corporation paid too much for the mill and lacked the expertise to run it profitably. Others note that despite high-tech equipment, the mill was not designed for maximum efficiency. Located across Resurrection Bay from Seward, away from the railhead, increased transportation costs pushed down the price Chugach was able to pay for its wood supply.

Mike Brown became president of Chugach Alaska in March of this year on the assumption that the mill was a loser that couldn't be revived. But, between creditor committee meetings and conferences with bankruptcy attorneys, Brown kept his pencil and computer in motion.

"I couldn't figure out why it didn't make sense," recalls Brown. "It always turned a profit when I did the numbers. If you take out the mistakes, it works. The mill didn't fail because it was a bad idea."

Larry Williams, president of Idaho Timber Corp. of Boise, agrees. Idaho Timber was one of several firms trying to pluck the mill from the quagmire of bankruptcy earlier this year.

"For $6 million to $8 million, you could have built a nice operation. If I'd built the mill myself, we'd have built it for substantially less and had essentially the same capability. The mill was a good idea. The implementation was disastrous," Williams says.

The reason Brown's pro formas kept pointing to a profit potential for the mill is its strategic location. The mill is designed and geographically well-positioned to accept the relatively smaller logs characteristic of Kenai Peninsula and Matanuska-Susitna Valley forests, as well as the marginal timber harvested from Native-owned stands and Chugach National Forest in Prince William Sound.

A number of analysts see the mill as a vehicle for salvaging millions of board feet of beetle-killed spruce, which has become a high priority for public and private landowners as the beetle epidemic continues to spread.

Perhaps more importantly, situated near a railhead that links tide-water with the rivers draining the vast forests of Interior Alaska, the Seward mill could play an important role in unlocking a whole new source of timber for Asian or domestic markets.

Williams personally devoted three weeks and "110 percent" effort to securing the mill before he was stalled by the complexities of dealing with a bankruptcy court and threw in the towel.

A New Plan

On behalf of his shareholders, with their substantially larger stake in the mill's future, Brown persisted and eventually assembled a team and a plan he says have a good chance of passing muster with court and creditors. The plan calls for Chugach essentially to buy back the mill, correct some of its design flaws and increase its capabilities for about $15 million, and for the firm to pay creditors 50 percent of mill profits. According to Brown, 80 percent of acquisition financing would be covered by a loan from the Alaska Industrial Development and Export Authority, the remainder by local banks.

Brown says the plan has two key operations elements that depend on partners with experience in successful timber operations and a proven ability to adapt to the industry's cyclical volatility.

The first element is provision for sufficient operating capital to maintain plant operations and do the costly and time-consuming legwork of developing markets. An acute lack of operating capital was part of the original mill crisis. These funds would be provided by one or more established firms active in Pacific Northwest logging. The second key operational element is a partner knowledgeable about mill operations and marketing.

"We didn't have a lot of that expertise before," Brown notes. "These guys know how to take a sow's ear and make a silk purse."

A Gamble, Still

Though Brown is confident of the mill plan and partners, the facility is not out of the woods yet.

"If you got it for free, there would be a lot of risk," notes Williams. "There is a lot of timber in that part of the country that could and should be harvested." But he says the mill needs a 20-year supply of timber to make it a profitable venture. That will require logs from both private and public lands. Analysts say despite a state administration friendly to logging, securing a stable supply of trees from state lands remains problematic.

"That's one of the gambles," says Williams.

Chugach still owns 700 million board feet of its own coveted timber, not a bad card to have in your hand on the second deal, say the optimists.

"I think I can do it. I'm trying to surround myself with good people and let them do what they know how to do," says Brown. "The maintenance on the mill has been done 100 percent. That mill is ready to start on about an hour's notice. There are no problems. We will build on our expertise and employ our shareholders."

If the mill works in the long term, it will become the most visible piece of timber development infrastructure in recent memory. But it coincides with a half dozen other operations, inventories, and feasibility investigations presently under way in Southcentral and Interior Alaska, driven in part by high prices for wood chips to make a variety of products.

World Market Trends

The success of any of these ventures depends on a host of things, chiefly market demand and the declining supply of Pacific Northwest timber. In a nutshell, there is more demand than supply. The appetite of both domestic and foreign markets for timber remains high and is expected to continue growing, while more and more publicly owned timber in western states is placed off limits due to environmental concerns.

These trends are already evident in Alaska, says John Sturgeon, president of Koncor Forest Products Co., a Native-owned timber management consortium with logging operations currently under way on Admiralty Island, Montague Island and Afognak Island.

Sturgeon says Japanese and Chinese buyers both prefer Douglas fir for home construction because of its strength, but harvest restrictions on National Forest lands have put Douglas fir prices at an all-time high.

"China prefers Doug fir but now they can't afford it. So they're buying things from Afognak they've never bought before. They're buying smaller logs separately. Demand from Japan has dropped, but supply has dropped even more and housing starts there are expected to go up. The Japanese are beginning to substitute hemlock for fir."

Sturgeon says the potential for Russian timber to enter the market in substantial volume is at least five years away.

"Russia just cannot get its act together and production continues to decline, and not because the trees aren't there," says Sturgeon.

According to Al Aitken, timber sales group leader for the U.S. Forest Service, Alaska Region, the market for Alaska timber has been high this year as the yen strengthened against the dollar, allowing the dominant Japanese buyers to secure more dollars worth of timber for less yen.

Alaska Lumber Sought

Aitken says it is significant that supply and demand trends have converged in such a way as to make rough-cut lumber and other primary products from Alaska a more important source for plants in the Pacific Northwest struggling to stay open. For example, the demand and price for wood chips has grown so much that it is now cost-effective to ship chips directly to the Pacific Northwest, rather than selling them to one of Alaska's two pulp mills.

"Alaska mills can now compete to fill in some of that supply for secondary manufacturers," says Aitken. He notes that further evidence of Alaska's growing importance in the current economic climate is inquiries the Forest Service has received from Lower 48 operators.

Aitken says several secondary manufacturers have called, complaining that prices for their raw materials have gone up; they're looking for a cheaper source, or a mill in Alaska to buy or joint venture with to produce rough-cut timber. Several primary manufacturers have also called, indicating that their supply is gone and expressing interest in buying or building a mill.

"What we tell them is they need to get familiar and involved in the Tongass timber plan revision," Aitken says. "Most of them say, 'Well, at least you guys are still selling timber.'"

Changing Regulatory Issues

True enough, but the Tongass is not without its own problems. The nation's largest national forest has long been the backbone of Alaska's timber industry. But in 1991, Congress substantially re-wrote the rules for forest management in the Tongass, eliminating roadbuilding subsidies, putting more land in wilderness and ordering a revamping of harvest contracts. As a result, the Forest Service is rewriting the Tongass timber plan, the vehicle by which the total allowable cut for the forest is established.

An allowable cut recommendation is expected by the end of the year and state and industry officials fear it will be set too low to sustain current levels of logging, mill operations and employment.

"The issues are pretty damn complicated. There is not much room to maneuver. There was more flexibility before the Tongass Timber Reform Act. That took a healthy chunk of the flexibility away," says Mike Barton, regional forester for Alaska and a man with considerable authority to dictate Tongass timber policies. "I feel a sizable obligation to the people who are making a living from both the national forests here in Alaska. Not just logging, but all areas, fish, recreation, tourism and timber. They all need the means to eat and send

their kids to school just like people down south."

Principal Challenges

Steve Brink, director of the Forest Service's Tongass Land Management Planning Team, notes that the southeastern forest has the biological capability to provide about 704 million board feet of timber a year "if all you cared about was cutting trees." But he says the industry faces three big challenges in the Tongass:

1. 40 percent of wood harvested goes in the chipper for the pulp mill because saw logs are such low grade;

2. 83 percent of the forest outside protected areas is still roadless. Roads cost $200,000 a mile and are no longer subsidized by taxpayers;

3. The physical terrain of Southeast is steep and rugged, which makes harvesting a costly proposition. Only 70 percent (490 million board feet) of the commercial grade wood is located in valley bottoms and on gentle slopes.

Brink says the most viable ways to overcome these obstacles are currently out of public favor on a national level: public funding for industrial infrastructure (roads and log transfer facilities), and allowing the export of round logs from national forests rather than requiring primary manufacturing.

According to Brink and Barton, 400,000 acres of second growth timber from the Tongass may help spawn some expansion of the region's value-added forest products industry, but harvest of these stands is 30 to 40 years away.

"We need to move into adding more value," says Barton. "That will become even more possible when we get into the second growth forests because we will have a lower volume of low-quality timber and because much of the infrastructure will be in place. I don't see one particular type of value-added being the panacea."

Future Viewed Tentatively

At present, the timber markets are good and Alaskan forests are being discovered by a new generation of industry players hustling to fill the gap created by harvest restrictions in the Lower 48. While the level of inquiry has steadily increased in the last year, no one is moving precipitously. The economic realities of operating on new ground are harsh.

"The demand for Alaska forest products is going to increase," predicts Larry Blasing, administrative assistant for the Alaska Forest Association. "But you have to operate with economies of scale. That naturally restricts the type of operations that attempt to relocate in Alaska."

Says Idaho Timber's Williams, "There's not a lot of opportunity for a lot of people (in the Alaska timber industry). There's room for a good operator in the Seward mill."

And there is yet ample room for both the pessimists and optimists when it comes to projecting just what the industry will look like one year, or 50 years, down the road.

"I think we're on the verge of a major change in the forest products field. But it's a little early to say how that's going to shake out," says Aitken, reflecting on the large forest stands now off limits in western states.

Aitken's boss, regional forester Mike Barton, echoes the sentiment.

"There's so many unknowns. Markets, creativity and ingenuity will dictate the future."
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Title Annotation:Chugach Alaska Corp.'s sawmill in Seward, Alaska
Author:Richardson, Jeffrey
Publication:Alaska Business Monthly
Article Type:Industry Overview
Date:Oct 1, 1992
Previous Article:Fish flap at False Pass.
Next Article:Fluor Daniel Williams Brothers.

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