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Competition Between Wood Products and Substitute Structural Products: An Econometric Analysis

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Abstract:

The primary objective of the study was to develop quantitative estimates of competition between softwood lumber, softwood plywood, and their major substitutes in construction: steel, aluminum, and concrete. An additional objective was to examine the degree to which wood products will be displaced as timber prices rise. Supply and demand relationships were estimated by ordinary and two-stage least squares using annual data for the 1947-74 period. The effect of competition by alternative materials was represented by the inclusion of lagged prices of substitutes in demand relationships. Other demand "shifters" included total housing starts, value of nonresidential construction, percentage of housing starts in one- or two-family units, index of industrial production, and wage rates for various categories of construction workers to represent the influence of installation costs. The set of supply-shifting variables included price of raw materials, employee wage rates, mill labor productivity, and price of fuels and power. Reduced form equations were estimated for the price and consumption level of each commodity and then incorporated into a computer simulation model. The simulation model was first used to generate a "control" series for the price and consumption level of each product using historical values of the explanatory variables over the 1953-74 period. Values of selected explanatory variables (stumpage price, housing starts, index of industrial production, price of fuels and power, and construction worker wage rates) were increased by 20 percent and used to generate a "perturbed" series in separate computer runs. The average deviation of perturbed values from control values was used as a measure of the effect of changing the selected variables. Estimates of demand and supply elasticities and measures of the relative importance of explanatory variables were obtained in addition to the simulation results. It was estimated that a 20 percent rise in the price of stumpage (and an associated 14 percent rise in saw-log price) would lead to decreases in lumber and plywood output of some 70 million board feet and 300 million square feet, respectively. This would be offset by a gain in steel output of some 70 thousand tons. Substantial decreases in concrete output were anticipated in response to a simulated 20 percent increase in the price of fuels and power, with offsetting increases in lumber and steel use. Increasing the index of industrial production by a similar percent led to substantial increases in the use of all materials, especially steel and aluminum. Increasing the level of housing starts showed similar effects with the largest increases in percentage terms showing up in the case of lumber and steel. In the case of wage rates for construction workers, it was estimated that a 20 percent increase would lead to a decrease in the use of all materials except plywood. The following estimates of (own price) demand elasticities were obtained from the model: lumber (-0.17), plywood (-0.67), steel (-0.93), aluminum (-0.83) and concrete (-0.51). Estimates of cross-elasticities of demand were also obtained. Largest values were observed in the case of the effect of lumber price on steel consumption (0.79), and steel price on concrete consumption (0.74). A negative cross-elasticity (-0.40) was obtained for plywood price and steel consumption. This was expected in view of their complementary relationship in flooring systems, but in this case, as in a number of others, results should be used with care because of a low degree of statistical significance. Forest Sci. 26:134-148.

Keywords: Demand elasticities; supply-demand relationships

Document Type: Journal Article

Affiliations: Research Assistant, Department of Forestry and Resource Management, University of California, Berkeley, CA 94720

Publication date: March 1, 1980

More about this publication?
  • Forest Science is a peer-reviewed journal publishing fundamental and applied research that explores all aspects of natural and social sciences as they apply to the function and management of the forested ecosystems of the world. Topics include silviculture, forest management, biometrics, economics, entomology & pathology, fire & fuels management, forest ecology, genetics & tree improvement, geospatial technologies, harvesting & utilization, landscape ecology, operations research, forest policy, physiology, recreation, social sciences, soils & hydrology, and wildlife management.
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