From the Archives: The Beginnings of the Tradewinds Debacle

According to yesterday's Tribune Herald, the Board of Land and Natural Resources is considering a 10-year extension of Tradewinds Forest Products' timber harvesting lease, despite the fact that Tradewinds has yet to build the specialty plywood plant on the Hamakua Coast that it promised as part of its contract.

Given yesterday's headline, it's worthwhile to remember how this whole mess began. The article below appeared in the Hawai'i Island Journal in March of 2001. It's sort of a cautionary tale on the drawbacks of contracts awarded on the low-bid system, without examining the bidders' finances....
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A Plywood Plant for Hamakua?

Despite a depressed plywood market, a bankrupt backer and community skepticism, the state and an Oregon firm move forward with plans for a huge Big Island mill.

by Alan D. McNarie

A West Coast based company named Tradewinds Forest Products took a major step toward building a new plywood factory on the Hamakua Coast last month. The company has inked a 15-year contract with Prudential Timber for trees from its eucalyptus plantations on the Hamakua Coast and Parker Ranch to supply its proposed mill. But the company still faces serious community opposition and a gauntlet of regulatory hurdles – as well as uncertainty about the venture’s economic survivability.

Tradewinds’ project would be one of the largest single industrial facilities ever proposed for the Big Island. The main building alone would cover seven acres; the overall plant size, including a log yard, onsite wastewater treatment facility and wood-waste-fueled power plant, would require 60-70 acres. Tradewinds estimates that it will require 30,000-40,000 acres of Hawai`i-grown wood to run the plant, which would produce construction, industrial and architectural plywood, specialty lumber and wood chips as “primary products.” It would also import about 100 million square feet per year of softwood veneer to use in its plywood products. The company estimates that its plant would employ approximately 300-400 full-time workers, and another 150 contract workers, including truck drivers and loggers. It would add an estimated 90 trucks per day to traffic on Big Island highways, primarily between the mill, logging sites and the ports of Hilo and Kawaihae.

That is, if it is built and proves financially viable. As of press time for this article, the company’s financial backer had declared bankruptcy and the plant still has secured no alternative source of funding. But Tradewinds President Don Bryan believes that the contract with Prudential Timber will make securing that backing much easier.

The stakes in Tradewind’s Hawai`i gamble are huge, and involve some of the island’s biggest economic players. Kamehameha Schools, formerly Bishop Estate, has leased much of its Hamakua Coast holdings to Prudential Timber, which has committed at least 16,000 acres to tree plantations – mostly fast-growing eucalyptus. Prudential Timber recently leased another 10,000 acres of land from Parker Ranch for more eucalyptus plantations, and C. Brewer has leased thousands of acres in Ka`u for more tree plantations. Tradewinds first proposed its mill as part of a winning bid to harvest and replant 11,700 acres of “non-native” forest in the DOFAW’s Waiakea Timber Management Area (WTMA). The Waiakea timber management plan has been touted as model for other timber holdings in DOFAW’s 700,000-acre domain. The Forest Management Plan for WTMA projects "an aggressive yet attainable integrated forest industry initiative of 60,000 acres of forest plantations on the island of Hawai`i."

But some Hamakua residents worry that the plan could become another sugar industry in many negative senses: chemical pollution, erosion, and eventually a closed factory – only this time, with thousands of acres of eucalyptus trees to clear instead of cane fields.

“What is going to happen if they can’t make it in the world market with that plywood and veneer?” worries Ada Pulin-Lamme of the community organization Friends of Hamakua. “What is this plan going to turn into? It’s not something that’s going to sit there with that much of an investment. There’s going a joint venture partnership, and they’re going to make some demands...Is a pulp mill the next step?”

West Coast Plywood Woes

At one time, Tradewinds thought it already had financial backing for its mill. When the company first proposed the plant, it was a partnership of two other West Coast firms, The Timber Exchange and Quality Veneer and Lumber (QVL). The Timber Exchange, whose President is also Bryan, is primarily a forestry brokerage that buys and sells large blocks of timber and land in the Pacific Northwest. QVL, whose chair and CEO at the time was Gordon Boyd, was formed in 1998 with $30 million in capital and a $50 million credit line to buy and operate four lumber and plywood mills in Washington and Oregon; it was expected to supply the investment capital for the Hawaii venture, as well. But in the fall of 1999, Boyd abruptly left QVL, citing differences over “the way QVL should be managed,” and QVL pulled out of Tradewinds – events that Bryan describes as “simultaneous.” Boyd remains involved in Tradewinds, and Bryan says Boyd will manage the Hawai`i plywood plant if it is built.

“His skill is on the mill side and the marketing side. My skill is on the timber side,” Bryan told the Journal.

To alleviate some of residents’ fears, Tradewinds had invited a delegation of concerned residents and county officials in the fall of 1999 to tour QVL’s Omak plywood plant – only to cancel the tour at the last minute, when QVL pulled its funding. Within months, Omak had shut down.

Within a year of Boyd’s departure, QVL had closed all of its mills and declared bankruptcy. One mill had been closed and sold shortly after its purchase. The company cited a depressed plywood market in its closure of its Omak plywood mill on June 12, 2000. The Omak Mill closing cost Okanogan County over over280 mill jobs and approximately $5 million in wages. The company’s Mayr Bros. mill shut down in August. On September 25, QVL’s Hanel Lumber Company closed abruptly, locking out 120 mill workers and costing Odell County an estimated 100 additional jobs in supporting industries. The state finally intervened to pay the workers their last two weeks’ wages. On January 31, the bankruptcy court removed the company’s current management and placed its remaining assets under trusteeship.

QVL wasn’t alone in its misery. One Oregon statistical firm, Paul Ehringer and Associates, has estimated that between 1989 and 1999, 219 sawmills closed in five Western states. During the same period, at least 144 sawmills, veneer mills and plywood plants have closed in Oregon alone in the past decade. Last summer, according to U.S. Forest Service estimates, more than 160 softwood sawmills in the United States temporarily halted production, due to a glut of forest products on the market.

When asked how his company intended to keep the Hamakua plant from becoming another Omak, Bryan replied, “One way is, we’re going to keep Mr. Boyd on the payroll. When he left, QVL was in good shape.”

Newspaper court papers related to the bankruptcy, however, suggest that QVL may already have been in trouble before Boyd left. In October of 1999, only a month after QVL canceled the trip to the Omak plant, the Federal Register contained a notice that QVL had applied for relief in the form of “worker adjustment assistance” under the North American Free Trade Act (NAFTA) – and had been turned down. In its successful motion to remove the company’s current management, creditor GECC alleged that, while QVL made a slim overall profit for 1999, “all was not well with QVL and lumber prices continued falling precipitously during the fall of 1999....”

Some of QVL’s wounds, however, may have been self-inflicted – and the GECC filing gives credit to Boyd as a whistleblower, for passing on documents that indicated two other company officers had paid themselves $100,000 bonuses with money that should have gone for delinquent taxes and insurance. But GECC also questions the propriety of $172,582 in severance payments made by QVL to Boyd, when other creditors were waiting in line.

“Commodity plywood is soft right now,” admitted Bryan. But instead of commodity plywood – the common softwood plywood used, for instance, in house walls – Bryan said the Hawai`i plant would specialize in “various specialty products that target high strength engineering applications” such as “laminated veneer lumber” – extra strong plywood that could replace sawn roof beams in houses, for instance.

But QVL had pursued a similar strategy of specialization with its Oregon mills. When it bought the four mills in 1998, Boyd told the Portland Oregonian that the company would refocus “from commodity lumber and plywood to specialty wood used in modular housing and engineered wood products.”

The proposed Hawai`i mill would enjoy at least one advantage, however. One of the problems facing West Coast mills has been not only an oversupply of finished plywood, but a shrinking timber base, as old-growth forests disappeared and environmental regulations tightened to defend what remained. A stand of pine or fir on the West coast takes about 40 years to regrow. But Hawaii’s eucalyptus plantations can produce veneer logs for plywood in as little as nine years.

“They Can’t Export Raw Logs”

“We didn’t receive any other proposals that even came close to the level of Tradewinds’,” maintains DOFAW head Mike Buck, when asked why his agency stuck with Tradewinds instead of rebidding the contract after the QVL fiasco.

DOFAW was badly burned in 1997, when it proposed to lease state lands in Hamakua to the Japanese consortium Oji Paper/Marubeni to grow eucalyptus for wood chips, which would have been sent to Japan for conversion into paper products. The plan was voted down by the Board of Land and Natural Resources in the face of massive community opposition. In putting together its management plan of Waiakea Timber Management Area, DOFAW set up some stringent criteria designed to meet some of the public concerns expressed during the Oji Paper debacle. One concern was the lack of local jobs that the Oji Paper proposal would have generated. The WTMA management plan required that the winning proposal would generate such jobs.

“They can’t export raw logs. They can’t export wood chips as their only product,” said Buck – although wood chips were considered as a viable use for wood that was unsuitable for plywood or lumber. He added, “We have to make sure that in our timber licenses, we are protecting the public’s interest, and we’re not going to have any timber harvested unless the facility has been built.”

But DOFAW has other goals in mind as well. “One of the major reasons to be involved is that Hawaii needs a viable use for these large tracts of agricultural land,” Buck explains. He basically sees three alternatives for plantation-sized blocks of land such as the former Hamakua Sugar holdings: pasture, timber, or subdivisions. “If we don’t’ tie up some agricultural land and keep it in green, the quality of life is going to go down,” he believes.

Lessons from Big Sugar?

But on the ground in Hamakua, some residents see hundreds of different opportunities for the land, not just a few larger ones.

“Why are we in such a hurry to push a big industry, when wonderful, diversified agriculture is beginning to blossom – like vanilla bean, cacao, the different medicinals, like noni, awa, and aloe vera? There are so many crops here – it’s just going to take time for this to come about,” says Friends of Hamakua Secretary Linda Lyerly. “We really wouldn’t mind a smaller saw mill veneer plant. But this is so huge – too big for this island. Seven acres under one roof....”

Also weighing on residents’ minds are the lessons of Big Sugar, which plunged the entire island into a depression with the collapse of a single crop. They aren’t anxious to repeat the experience.

Friends of Hamakua has launched a petition requesting and Environmental Impact Statement on the entire plywood operation, from tree plantation to factory to harbor, before the WTMA management contract is finalized. So far, over 700 residents have signed the petition.

Even without an overall EIS, the project still needs to overcome several regulatory hurdles. Although it didn’t rebid the WTMA contract, DOFAW held up the final approval process until Tradewinds could get on sounder financial footing. Now that the company has assured itself of the Prudential Timber contract, Buck says DOFAW will forward a final contract proposal to the Board of Land and Natural Resources for approval.

Tradewinds still has to decide on a site for its mill and perform engineering studies; when those are done, it has to go through rezoning and permitting processes for the factory and power plant. “The Department of Health would be the lead state regulatory agency for the permitting process” for that stage of the project, says Buck.

Buck thinks the company probably will have to pay around $2 million for the permitting process alone.

Bryan believes that if all those hurdles are cleared, the earliest the mill could come online would be in two years. “My guess is before we are truly up and running, it’s three years from now.”

If construction is completed, the challenge then becomes to keep the mill running.

“The more inundated we get with trees, the more land gets filled with trees, the more the people in the state will feel that the need to accommodate the people with the trees, and it’s going to be at the expense of the people who live here,” worries Pulin-Lamme.

But Bryan remains confident. “We’ve been five years into the investigation of this business,” he told the Journal. “We’ve thought it through, and we’re ready to get started.”