guest columnist Michael J. Parks,
publisher and editor of Marple's Business Newsletter
Rogel's Reasoning Listening
recently to Weyerhaeuser chairman Steve Rogel explain why he felt the necessity
to pursue Willamette Industries for more than a year got me thinking about a
couple of basic economic principles that are often overlooked. Among other
reasons, Rogel said Weyerhaeuser went after Willamette because in this
eat-or-be-eaten world, he feared Weyerhaeuser might become a takeover
Think about that for a minute.
Proud Weyerhaeuser, more than 100 years old, controls one of the largest private
accumulations of softwood fiber in the world. In the United States alone, it
owns in fee nearly two million acres in the West, over three million acres in
the South. In Canada, renewable long-term licenses cover more than 32 million
acres, about two thirds of which is forestland. And softwood fiber isn't going
out of style.
On the solid wood side (lumber and
panels), the U.S. housing market lately has been about as strong as it has ever
been, thanks especially to low interest rates. As for the paperless society,
every country in the Western world today uses more paper on a per-capita basis
than it did ten years ago. U.S. consumption of uncoated free sheet, the most
common office paper, rose 15 per cent between 1995 and 2000.
On the timber-supply side,
publicly owned forests in the United States- which 20 or 30 years ago provided
most of the wood fiber to sawmills and panel plants and, indirectly, to pulp and
paper mills-are today essentially off limits to commercial production, courtesy
of the environmental movement.
With demand for fiber going up and
ostensible supply going down, one would think fiber-rich Weyerhaeuser would be
safely perched in the catbird seat. Instead, Rogel is worried that Weyerhaeuser
could be swallowed up. The reason is that tangible assets - trees, for instance
- are less important in today's economy than they used to be.
One of today's economic paradoxes
is that in real terms (adjusted for inflation), the price of most material
things - wood or paper or steel or aluminum or computer chips - is going down.
Bill Emmott, then the editor of The Economist, the London-based weekly, put it
far more elegantly than I ever could.
Writing in September 1999 about
the "population explosion" that greens fear will overwhelm the earth's
resources, he made this eye-opening observation: "The remarkable fact is
that even though the earth's population has more than trebled in a century, the
best measure of the scarcity of resources - price - has fallen virtually
throughout that time for just about everything extracted from or grown in the
Yet price has risen, in the form
of wages, for the one thing that has become far more abundant: people." The
cost of stuff, in other words, is going down, even as the cost of people goes
up. Another principle that Weyerhaeuser and others in the forest industry must
contend with is this: Value today, as The Wall Street Journal observed recently,
"is increasingly derived from intangible assets - intellectual property,
innovative technology, financial services or reputation." Think Microsoft,
Pfizer and Walt Disney, to pick some positive examples, or Enron on the other
side of the ledger.
Now you know part of why Rogel
fears that Weyerhaeuser, whose physical assets would be hard to replicate in
today's world, could become a takeover target. In a recent speech, Rogel noted
that Weyerhaeuser and its peers don't get much respect on Wall Street, in part
because they are locked in a business that never stays prosperous for very
Rogel's spin on why the cost of
stuff is going down is that there are too many players, and none with the
discipline to keep from adding to capacity when prices are strong. Rogel notes
that with the arrival of Asian players, the paper industry's cycles have "plateaued
into constant over-capacity - too much product, not enough buyers. The result
has been lower prices (and) falling margins." Thus consolidation is
necessary and, says Rogel, "(is) in full flood now," both in the U.S.
and elsewhere, with the Weyerhaeuser-Willamette deal just the latest in a
The operating premise of
consolidation, he adds, is a greater balance of supply and demand. His
assessment: "The early returns are promising." As an amateur
economist, my response is: "We'll see." I would argue that the price
of paper and building materials and other "stuff" inevitably will
continue to decline, mainly because of higher productivity, driven largely by
advances in technology. But grant Rogel this much: By growing larger,
Weyerhaeuser certainly reduces the risk that it will become someone else's meal
in the "eat or be eaten" world that free-market capitalism in all its
glory has become.
As Rogel certainly knows, he will
need as well to move Weyerhaeuser ever higher in the food chain - to add value
to Weyerhaeuser products any way possible - if Weyerhaeuser is to remain
independent for another 100 years. Michael J. Parks is the publisher and editor
of Marple's Business Newsletter, Seattle. The every-other-week newsletter covers
the economy and companies of the Pacific Northwest.
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