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TECHNOLOGY 39
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THE IMPACT OF COST AND PRICE

FLUCTUATIONS ON US HARDWOOD

SAWMILL PROFIT

Operating costs make up a considerable share of a sawmill’s cost structure and are, therefore,
crucial for understanding the fiscal health of a given operation. Using the assumption that today’s
depressed lumber and residue markets result in sawmills, on average, making no profit and
incurring no loss, this study estimated operation costs of a hypothetical 4, 8, and 12 MMBF
production hardwood sawmill in the eastern US producing red oak lumber. Using this knowledge
and the Log Recovery Analysis Tool (LORCAT), this study found that a sawmill’s financial well-
being is highly dependent on hardwood log and operating costs as well as lumber prices. By Urs
Buehlmann, Virginia Tech, and Edward Thomas, US Forest Service

ith record low demand for graded lumber, many
eastern US hardwood sawmills struggle to be Katja Schulz
Wprofitable. A simple model of a sawmill’s cost
structure consists of log cost, e.g., the raw material, and the
operating cost, e.g., the cost of operating the mill including
the administration to manage and sell the resulting products.

Those products, mainly lumber and residues, hopefully
allow a hardwood sawmill to make a profit and sustain its
business. However, the individual cost and revenue structure
of a sawmill is, probably, the most guarded secret of the
industry. It can also be argued that some mills only have important to industry practitioners.
sporadic knowledge of their costs. Perkins et al., in their case study of the economic feasibility
In the past three years, operating costs for hardwood of a red oak small-diameter timber sawmill and pallet-part
sawmills have increased 30-40 percent and thus have become mill, used actual cost information based on the participating
increasingly scrutinised by operators to ensure the long-term mill’s 2005 operation data.

survival of the sawmill. These authors give a detailed accounting of the hypothetical
Knowledge of operating costs helps determine the success sawmill cost components, with log costs being “the single
of a sawmill business and can be used to improve the financial largest cost component for sawmills”.
success of any given sawmill. Using break-even analysis, net present value (NPV) analysis,
Also, if a sawmill wants to know if a given combination of and internal rate of return (IRR) analysis, these authors found
logs (diameter class, length, species, grades) breaks-even or that using the sawmill and pallet-part mill was economically
makes a profit, (in industry parlance known as the break-even feasible, but a new sawmill (scragg mill) was not. Except for

log problem), knowledge of operating costs is necessary. That this publication, publicly available cost data for eastern U.S.
is why an understanding of operating cost data is crucially hardwood sawmills is hard to come by.