Wood Stocks Up on Mill Closures
Wall Street cheered loudly on Wednesday as major wood and paper companies said they’ll slash production to try to revive profit growth.
But the factory closings and resulting job losses may herald a wider shift by U.S. firms to cut costs amid weak earnings and slumping stock prices. If the wood and paper companies are just the vanguard, could the days of the amazingly robust U.S. job market be numbered?
International Paper Co. and Georgia-Pacific Group on Wednesday separately said they will close mills to help eliminate a market glut of wood products that has hammered their earnings.
International Paper, the world’s biggest papermaker, said it will shut three paper mills. Georgia-Pacific plans to suspend production at eight lumber and wood-board plants “indefinitely.”
The news sent IP’s shares (ticker symbol: IP) rocketing $3.19, or 12%, to $30 on the New York Stock Exchange. But the price still is 50% below the 52-week high.
Georgia-Pacific’s shares (GP) jumped $1.38 to $22.63. Rivals’ stocks also rose, including Weyerhaeuser (WY), up $4.31 to $41, and Mead (MEA), up $1.69 to $23.63.
IP said its third-quarter operating earnings totaled $260 million, or 53 cents a share, up from $193 million, or 46 cents, a year earlier. But results were far below the 75 cents a share earned in the second quarter.
Sales rose 25% to $7.80 billion, but that was mainly the result of the company’s June purchase of Champion International.
At Georgia-Pacific, operating profit fell to $145 million, or 85 cents a share, in the third quarter, from $230 million, or $1.31, a year earlier. Sales fell 3.1% to $5.31 billion.
Papermaker Mead said its operating profit rose to $62.4 million, or 61 cents a share, up 27% from $49.1 million, or 46 cents a share, a year earlier. But the company said its plants will have “significant downtime” in the current quarter.
Paper shipments overall have declined in recent months as the economy has cooled. Meanwhile, lumber prices are near six-year lows as the housing market has weakened while supply, boosted by cheap wood imports from Europe and South America, has mushroomed.
IP’s plant shutdowns will trim about 5%, or 1.2 million tons, of its papermaking capacity and eliminate 2,500 employees, a spokesman said. The mills set for closing are in Mobile, Ala.; Lock Haven, Pa.; and Camden, Ark.
Georgia-Pacific declined to disclose the impact on jobs or the location of plants it will close. But the company said the plants account for 10% of its wood board-production capacity and more than 20% of lumber-production capacity.
The shutdowns show the industry’s leaders are taking steps they’ve been reluctant to take in the past when product prices fell, analysts said.
“IP and GP deserve a heck of a lot of credit for stepping up to the plate,” Credit Suisse First Boston analyst Mark Connelly said.
But the hefty cost-cutting raises questions about whether more companies are shifting back to early-1990s mode, when restructurings led to widespread job losses across the economy in the name of higher profits.
Another industrial giant, machinery maker Ingersoll-Rand Co., said Wednesday that it will lay off 4,000 employees, or about 8% of its work force, and close 51 facilities by the end of 2001.
The company, which last month warned of a profit shortfall, reported third-quarter operating earnings of $139.6 million, or 86 cents a share, up modestly from $132.8 million, or 80 cents, a year ago.
Ingersoll-Rand shares (IR) fell $1.56 to $30.50, lowest since 1997.
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The Knock on Wood
Lumber futures prices have plunged in recent months to their lowest level in nearly six years amid a glut of supply. Even as housing demand has slowed since spring, wood supplies have ballooned, thanks to cheap imports from Europe and South America.
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Monthly closes and latest for lumber futures in Chicago, price per 1,000 board feet
Wednesday: $219.50
Sources: Bloomberg News, Times research
