Housing, CARE and polyester recycling, Somerset Hardwood

By Kemp Harr

Despite the lack of GDP growth in the first quarter, economists are predicting that the remaining three quarters will bring up the net average for the year to 2.3%, which is very close to the economic growth we experienced in 2014. Once again, housing has gotten off to a slow start. In the first quarter of this year, single-family starts were tracking at 47% of normal. Normal, according to the National Association of Home Builders (NAHB), is an annual pace of 1.343 million homes.

In a recent presentation, David Crowe, chief economist with the NAHB, told the audience not to expect a sizable uptick anytime in the near future. In his presentation, which he titled “Subpar Recovery,” he showed a series of slides that tracked the rate of recovery following the last seven recessions in five areas that are considered economic barometers: GDP, employment growth, private sector wages, and multi-family and single-family housing production. In all but one area, this last recession has been the slowest to rebound versus all previous recessions in the last 55 years. The only area that has outpaced other recoveries is multi-family housing production.

In fact, the share of homes sold that are new is tracking at 9.2%, and prior to this last recession, it normally averaged 16.3%. One key factor that could reverse this trend is a recent spike in household formations. In the last two quarters, household formation has risen well above an annual pace of 1.4 million households, after averaging around 600,000 since early 2007. 

According to Crowe, single-family housing starts should increase 9% this year and 39% next year to a pace of just under one million units. He attributes much of this uptick in growth to the first-time homeowner finally entering the market.

CARE AND POLYESTER RECYCLING
The issues facing the Carpet America Recovery Effort (CARE) haven’t changed much in the past year. When the group met last month in New Orleans, a lot of the focus was on finding economically viable solutions for rising levels of polyester (PET and PTT) carpet that are clogging up the collector/sorter network, which CARE has nurtured into existence over the last 13 years. 

Fortunately, the value of the materials that can be extracted from used nylon carpet continues to offset the cost of reclaiming it. Nylon 6 polymer can be reconstituted back into carpet fiber, and nylon 6,6 is sought after by the automotive industry as an engineered plastic. 

A solution must be found for polyester carpet, especially now that it has passed nylon here in the U.S. as the leading type of carpet sold into the residential market. The irony in this whole equation is that many consumers buy polyester carpet thinking that they are making an environmentally friendly decision, based on all the point of sale materials touting the use of recycled bottles or bio-based content. But today, based on the current carpet recycling infrastructure that’s been developed, nylon carpet is far more attractive to recyclers.

Frank Endrenyi, who spent years focusing on sustainability at Mohawk, is now CARE’s point person for finding a solution for worn out polyester carpet. In his presentation last month, Endrenyi pointed out that there are three basic outlets for used PET carpet: waste to energy, fiber markets and polymer pellet markets. 

While waste to energy (WTE) is not considered recycling, polyester carpet is an attractive energy source due to its level of BTUs and due to the fact that it burns fairly cleanly, much like natural gas. And fortunately, additional energy does not have to be spent separating the components, since the backing and the latex also contribute to its stored energy. Endrenyi admits that WTE should not be the primary solution, but it has to be part of the answer, since some post-consumer materials cannot be adequately separated and cleaned.

In the fiber and pellet markets, the carpet fiber must be separated from the backing and calcium carbonate filler. As Ron Greitzer with LA Fiber discovered years ago, once the fibers have been separated and cleaned, they can be needlepunched together to form a pad that can be used under new carpet installations or in the upholstered furniture market as padding. It can also be used for sound insulation. A few composite lumber companies are also considering switching from polyethylene to PET as their core source of raw materials, but that solution is still on the drawing board.

Endrenyi thinks the largest opportunity for consuming waste polyester carpet long term is on the pellet side. But the issue in the pellet market today is removing all of the foreign materials prior to processing so that the pellet is “solid state” or contaminant free. The end use product for these pellets would be packaging materials like food trays. One Italian company has recently developed an extrusion line that is currently being tested. It might be part of the solution in this sector.

A second and critical issue that CARE is dealing with is the fact that CalRecycle, the California state agency charged with monitoring CARE’s activities related to AB-2398, sent CARE a letter last year putting it on notice for being non-compliant based on a lack of continuous and meaningful improvements. AB-2398 is the EPR (extended producer responsibility) legislation, implemented in 2011, that assesses consumers a fee when new carpet is purchased to offset the cost of recycling the product at its end of use. This fee was doubled in California last year from $0.05 a yard to $0.10 a yard for all carpet sold in the state. Based on the amount of carpet sold annually in California, this fee is projected to raise $10 million a year.

Next month, CalRecycle will determine if it plans to continue to use the CARE organization to administer the collection and disbursement of fees related to this legislation. While there hasn’t been a major step change in the amount of carpet in California that was recycled in the past year, there have been several key initiatives that should result in stronger numbers in the next couple of years.

Just a few years ago, CARE operated with an annual budget of just a few hundred thousand dollars. Today, that budget is approaching $15 million, thanks to the increased fees in California and the nearly $5 million donated from the industry producers in the new Voluntary Product Stewardship (VPS) initiative. This budget increase should give the organization the type of horsepower it needs to make a measurable difference in the amount of used carpet that gets recycled.

SOMERSET: QUIETLY GROWING SHARE
There are several privately owned suppliers in the floorcovering business that like to keep a low profile and not bring attention to their size, marketshare or marketing strategy that’s driving growth. One such company is Somerset Hardwood, which is one of the top five hardwood flooring producers, and Floor Focus estimates its annual sales at well over $100 million. Last month, I drove up to Somerset, Kentucky to take a look at its impressive integrated operation. The owner, Steve Merrick, has had sawdust in his veins his whole life—his father’s company, Cumberland Wood and Chair, produced wood furniture. When Steve started Somerset, he chose to focus on wood flooring. 

The company is vertically integrated. In addition to producing solid hardwood flooring in Kentucky and engineered hardwood in Crossville, Tennessee, the company also owns a sawmill, drying kilns, a pellet mill and much of the land that grows the trees. Most of the lumber that the firm uses comes from within a 100-mile radius of Somerset. All of the company’s products are made in the U.S., and it employs 800 people at its six facilities.

Part of Somerset’s success comes from a disciplined channel strategy. Somerset chooses not to sell to the home centers, it refuses to sell around its own loyal distributors, and it won’t sell via the Internet. It does have some unbranded business, but those products are also only sold through distribution.

Every step of the process from live tree to boxed flooring is controlled by the company. When Somerset first entered the engineered hardwood business, it sourced the products from China, but quickly shifted that business to a former cabinet factory in Crossville, Tennessee that it was able to purchase in 2008, during this last economic downturn. 

There is also discipline in what the company chooses to make. Its thinnest engineered product is 1/2" thick, and all of its veneers are thick as well. The only plywood core that the company uses for its engineered flooring is 7-ply Baltic birch. It only sells species that are grown in the Appalachian region, and it doesn’t produce any handscraped products. Its finish vendor, which supplies most of the other U.S. producers, says that Somerset uses more finish per square foot of product than any of its other customers. And thicker finish results in fewer claims.

During the warmer summer months, Somerset has learned to fully utilize the natural resources of the Lake Cumberland area by allowing distributors to invite their retail customers down for plant tour. Prior to the tour, the whole group takes an evening excursion on the company’s massive houseboat. Dinner is served while slowly cruising the lake, viewing the bald eagles that live in area, and both Somerset and its distributors get to know the retailers better. When the tour starts the next day, everyone has gotten a healthy dose of Southern hospitality from the host, and all of the retailers have learned from each other as well.

JULY’S RETAIL SURVEY
Next month we will be publishing the results of our annual retail survey. We’ve just finished conducting the research and I’ve been poring over the results with great interest. I don’t want to give away any of the findings in advance, but we are encouraged by the level of participation and the enthusiasm we see in the results.

Related Topics:Mohawk Industries, Crossville