May/June, 2002





guest columnist

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 target. 

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 earth. 

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 long. 

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 series. 

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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