NEW YORK (TheStreet) -- Cheap wood flooring, furniture and cabinetry from China that contains high levels of the chemical formaldehyde may or may not be bad for your health, but it's definitely bad for your portfolio.
A 60 Minutes investigation of retailer Lumber Liquidators (LL) - Get Reportalleged that most of its laminate flooring product had much higher levels of formaldehyde than is acceptable under California law -- and it's killing the company's stock price, which is down about 20% in trading following the report.
The chemical, which has been linked to cancer in animals and humans, is used in the manufacture of a particularly inexpensive kind of laminate flooring. The CBS (CBS) - Get Report news program accused Lumber Liquidators of illegally selling this potentially dangerous flooring in California and nationwide, where a similar law will take effect later this year. Lumber Liquidators disputed the CBS report and said in a statement that it stands "by every single plank of wood and laminate we sell."
In 2010, Congress passed the Formaldehyde Standards for Composite Wood Products Act, which adopted California's criteria for safe levels of the chemical in consumer goods. The law is expected to start being enforced this year.
California passed rules in 2007 limiting the amount of formaldehyde that can be emitted by various pressed wood products to around 0.1 parts-per-million, which is below levels considered carcinogenic. The rules were drafted under the state's 1986 Safe Drinking Water and Toxic Enforcement Act, better known as Proposition 65. Products that meet the guidelines are labeled CARB compliant, for the California Air Resources Board.
Despite the rules already enforced in California and those pending nationwide, pressed wood tainted with illegal levels of formaldehyde product still reaches U.S. consumers.
The dangers, however, aren't new and aren't limited to wood flooring. "Pressed wood," used to make laminate flooring, is also used in cabinetry, furniture, skateboards, musical instruments and other products. Formaldehyde doesn't have to be used to make pressed wood, but it often is because it's an inexpensive and effective adhesive.
"There are two parties at fault: the companies that choose to do business this way and the state of California and the Federal Trade Commission for failure to enforce our laws," says Kip Howlett, president of the Hardwood Plywood & Veneer Association, an industry association that represents U.S. wood manufacturers and also conducts testing of products for chemical levels.
In 2014, the HPVA conducted tests of wood flooring manufactured in China and sold in the U.S. and found higher than acceptable levels of formaldehyde in products labeled CARB-compliant. 60 Minutes also found products mislabeled CARB-compliant in its investigation.
In recent years, the companies that the HPVA represents have been hit hard by Chinese imports.
U.S. imports of furniture and cabinetry from China, including pressed wood products, increased to $18.5 billion in 2014, up from $4.4 billion in 2000, according to data from the Census Bureau, which tracks U.S. trade statistics. Imports of flooring have increased more than tenfold in that time to $478 million. This has eaten into market share for U.S. companies in the furniture, flooring and cabinetry business, according to Howlett.
All the firms 60 Minutes linked to excess formaldehyde in CARB-compliant certified goods were Chinese. According to Howlett, whose organization also tests and licenses U.S. facilities for CARB compliance, no U.S. companies that have been certified CARB-compliant use the chemical at illegal levels.
While formaldehyde has been linked to cancer in animals and humans, there may be little need to panic -- unless you're a Lumber Liquidators investor. Studies on occupational exposure to the chemical haven't been completely conclusive. The American Cancer Society, which tracks research on known carcinogens like formaldehyde, does not highlight any damning research on formaldehyde in the home.
Rats exposed to formaldehyde in the lab exhibited higher rates of certain kinds of cancer. Several epidemiological studies have linked the chemical to increased risk of cancer for embalmers and other medical professionals who handle formaldehyde commonly at work. There have been other studies, too, that link occupational exposure of the chemical to health problems.
The American Cancer Society follows the Environmental Protection Agency's recommendations on formaldehyde exposure in the home regarding pressed wood products. The EPA recommends using "exterior-grade pressed-wood products to limit formaldehyde exposure in the home. ... Before buying pressed-wood products, including building materials, cabinetry, and furniture, buyers should ask about the formaldehyde content of these products."
It might not matter for Lumber Liquidators and other companies found to include the chemical in their products. Consumers often suffer from "chemophobia," an irrational fear of chemicals based on misunderstood science, according to Dartmouth department of chemistry professor Gordon Gribble. Alarmed consumers often fail to realize that many common chemicals, both natural and synthetic, are only toxic in high levels, Gribble said in a February 2014 presentation.
In 2013, Johnson & Johnson (JNJ) - Get Report removed a formaldehyde-releasing chemical from several of its products, including baby shampoo, due to public outcry, despite the fact that the chemical was present in extremely small concentrations. A Johnson & Johnson scientist told Slate in 2014 that, "It would take more than 40 million baby shampoo baths in a single day to reach the formaldehyde levels set by California's Proposition 65." Nonetheless, the company changed its products' formulations.
Safe for babies, formaldehyde could be toxic for investors. The "poor on-camera interview by founder Tom Sullivan" defending the company "likely left viewers with a negative impression," according to a research note from Piper Jaffray (PJC) - Get Report analyst Peter J. Keith. And the stock price shows it.