ABBREVIATION

CIC – Champion Intl. Corp.

FWS – US Fish and Wildlife service

The ES Act – Endangered Species Act 1973

The CSR Act or Export ban – Forest Resources Conservation and Shortage Relief Act 1990

ESC or God Squad – Endangered Species Committee

The Owls – Northern Spotted Owls

BLM – Bureau of Land Management

USFS – US Forest Service

Thomas committee – Interagency Scientific Committee to Address the Conservation of the

NSO (Head by J.W.Thomas, convened from 4 agencies including the FWS, BLM, USFS and
National Park Service)

Thomas plan – Recommendation made by Thomas committee

HCA – Habitat Conservation Areas, which is 25% timberland within the owl’s range

mbf – Million board feet (an unit)

 CASE SUMMARY

1. CIC Assets (1990)

 U.S in total:
Timberland own: 6.4 million acres of commercial timberland, 1/4 is in Northwestern, US
(1/3 forest product division revenue, 60% forest product operating profit)
o 880k acres in Montana, Libby (80%), (20% stumpage); Bonner (50%), (50%
stumpage); other firms
o 180k acres in California: sell logs / stumpage to domestic processors, 100 mbf
o 240k acres in Oregon + 320k in Washington, Klickitat (50%), (50% stumpage);
Roseburg (25%; 75% stumpage); 70mbf other firms
 Total CIC Wood Product Mills: 13
Northwest: 4 wood production mills / No pulp & paper capacity
o 2 in Libby & Bonner (Montana), lumber and plywood manufacturing
o 1 in Roseburg (Oregon), plywood manufacturing
o 1 in Klickitat (Washington), lumber manufacturing
 Most valuable timberland: Kapowsin farm (Washington)
o High-value trees, rotation cycle 55 years
o Annual sale volume: 100mbf
o Exploitation mechanism: Clearcut
o Sale mechanism: Auction, mostly end up in export markets
o Non-operating business: Recreational service
o Pulp and papermaking capacity
 Weldwood - Canada
o Long-term contracts on land owned by Canadian Government
o Solid wood products + Pulp and papermaking Mill
 Brazil
Plantation site 1500 miles from the tropical rainforest, Pulp and papermaking capacity

2. CIC Business Lines

 Vertically integrated (a firm owning from timberland to mills and pulp & paper capacity)
 Logs/ Timber/ Timberland
 Solid wood products
 Pulp and paper Product

3. CIC Business Performance

 1979:
o Revenue: $3.75b; earnings ratio: $247m/$2.86b
o Main revenue-generating line: solid wood products (48%)
o Late 1970s: Timber prices exploded due to inflation and housing growth
 Early 1980s:
o Inflation and construction market collapsed
o Lumber prices (Revenue) low, cost of mill’s raw material (timber) high
o CIC retrenched, cutting back capital investment
 1984:
o Closed 5 lumber & plywood mills in the Northwestern; Acquired a similarly forest
products firm St. Regis;
 o Timberland acreage doubled, book value tripled
o Long-term debt doubled (from $1.08b – $2.17b)
o Generate Revenue from selling (not fit strategically) mills: Sold 2 pulp mills, retained
all timberland
 Late 1980s:
o Main revenue-generating and profit-generating line: pulp & paper
o Capacity modification & expansion cost: $269m in 1987
 1989:
o Capacity modification & expansion cost $857m
o Warren Buffett buy 8% of CIC (~ $300m convertible preferred stock)

4. Production processes and characteristics

 Harvest methods:
o Clearcut: harvesting all trees in the area (Environmentally Harmful)
o Clear cut + intensive tree cultivation (fertilize, plant & apply herbicides by helicopter)
o Harvesting cycle reduced by 10-20 years (more effective / greater economic benefits)
o Post-harvest site preparation & replanting = $160-$200 per acre
 Processing:
o Volume of products (lumber/plywood) = Volume of side-products (chips, sawdust,
shavings, bark)
o Cost of integrated pulp & paper mill = Cost of sawmill/plywood mill x 20 to 30
 Sawmills (lumber mill) & Plywood mills: Input = Logs; Output = Lumber, Plywood
o Lumber, plywood, paper: More valuable than logs/chips
o Can profitable be transported further
o Regional / national market: Numerous participants
o Construction & remodeling markets consume most lumber & plywood, but HIGHLY
CYCLICAL
 Pulp mills: Input = logs / chips; Output = Paper
o Logs and chips are cheaper to produce
o Market geographical limitation, should be processed NEAR harvest spot to avoid high
freight cost
o Local market only: Few buyers
o Pulp & paper mill will incur stiff cost (high cost) penalties for interrupted production

5. The Spotted Owl

 Status: Endangered Species, 60% Habitat lost since 1800

o Live in Old-growth federal timberland (USFS and BLM)
o Geography: Northwestern US
 Thomas from Forest Service plan to: Stop harvesting in the HCA
o Owl population would fall in the short run but increase in the long run
o June 1990: Northern Spotted Owl added to the list of U.S endangered species
o Federal & States Agencies Timber Sales fell from 5mbf to 2.6mbf, expecting private
timber sale to offset that amount

6. The Endangered Species Act and its impacts

6.1. The Endangered Species Act

The ES Act was passed in 1973, authorized through 1992

 Required FWS to add plants and animals in peril of extinction to a list. Federal agencies
must not allow actions that would harm the listed species or its critical habitat.
 Scope of prohibition: All individuals and organizations
 In 1978, Congress state Exemption mechanism from the Act if the benefits of propose
outweigh the environmental benefits

6.2. The impact of the ES Act

a. On Governmental agencies

 FEDERAL AGENCIES (USFS & BLM)

Owl habitat focused mainly in federal land; private timberland was barely affected.

 FEDERAL AGENCIES TIMBER EXPLOITATION & PROCESS

o Federal timberland accounted for 44% timberland in Washington and Oregon
o Federal supply accounted for 41% total supply in those states (1988)
o Exploitation mechanism: Bidding (not directly harvest / process)

Winning bidders made small down payment and paid the rest during actual harvest (started
within 3-5 years from auction)

o Operate under complicated statutes, for multiple and competing objectives

o Output determining: Conservative harvest – annual sale
volume ≤ forest growth rate
o Criticism: Below-cost sale – sell unprofitable timber
Auction revenue < Administer cost

 STATE AGENCIES
o State-controlled timberland accounted for 1/8 of total timberland
o Exploitation mechanism: Same as Federal agencies
o Operation: Required by law to maximize its net contribution to the state coffers.

b. On timber labor

 Federal agencies Estimation: Restriction would eliminate 28,000 related jobs by 2000
 Approval for FWS & the ES Act: FWS & Endangered Species Committee,
Environmentalists & Environmental Groups, Federal Agencies (USFS & BLM) &
Thomas Committee,
 Disapproval for FWS & the ES Act - The Exemption from the Act by Congress: Timber
Communities & Trade Association.

7. The Forest Resources Conservation and Shortage Relief Act 1990 , DeFazio response
and its impacts
7.1. The Conservation and Shortage Relief Act 1990 (Export ban)
 1974: Export of logs from federal land was banned
 The CSR Act 1990:
o Content: Permanent ban on export of federal logs
o Purpose: Encourage domestic conversion of raw material (log) to processed product
(moving up the GVC)
 7.2. The impact of the Export ban
 Export from state-owned land in Washington & Oregon: From 550-100mbf
 Export ban supporters: environmentalist / small mill owners / some political appointees
 Supporting reasons: Export ban would lessen the timber supply crunch
 Export ban protestors: longshoremen / teachers’ union / free trade supporter
 Protesting Export Ban reasons:
o Loss revenue from log sales (which helped support school system)
o Irrelevant politic motivation that transgressed property rights
o Expansion of protectionism

7.3. DeFazio approved private export ban

 DeFazio: Oregon Congressional Representative since 1987
 DeFazio & Congressional allies argued the Export ban should be expanded to private land
 Private Export has 3 problems
o Timber located Washington, Mills located in Oregon, Freight Cost to transport high
o Japan (China, Korea) applied high tariff to U.S wood product down the value chain
(processed timber) & non-tariff barriers
o Foreign Countries only accept raw materials (logs), which has lower value than solid
wood products (Plywood, lumber)

8. Impacts of regulations on CIC

 Pay attention to environmental values, Environmentalist were looking for other species to
list as endangered species
 Manufacturing: High Quality product (Kaposwin) with careful management & harvest
 Federal Stumpages decreased due to owl issues, need to find other supplies for mills
production or sold off mills
 Help Federal get the exemption on against the Owl, stand the chance of failure during
ESC convention because of the environmentalist’s political clout
 Survey on CIC land searching for owl habitat first, Loss per nest found: up to a million
dollar’s worth of timber
 Housing (the market that absorb the most lumber and plywoods from CIC) has been
declining
 DeFazio pushing a ban on private log export

CASE REQUIREMENT:

1. Prospect for CIC cash flows from forest product?

2. What changes should be made towards CIC asset:

- Regarding lumber and plywood production?

- Regarding harvesting on CIC timberland?

3. What steps to take in managing the relation between CIC and the Congress and agencies?