Strongly rising prices for coniferous sawnwood (softwood lumber) in North America and export sales to China are a convincing indicator of some very important fundamental supply-side structural changes taking place in the global timber industry.
The same can be said for global trade in coniferous and non-coniferous sawlogs. Both trends suggest that good times may be just around the corner for many parts of Europe’s timber industry.
It’s true that most of the anticipated rise in profits is likely to be focused on coniferous timber producers operating in North America. That’s in part why leading European sawmillers, such as Klausner, are investing in softwood lumber manufacturing capacity in the US.
For regional capacity and market-share reasons, Canadian sawmillers such as West Fraser, Canfor and Interfor are doing the same – accounting for the bulk of recent mergers and acquisitions in the US south.
What’s being under-estimated, we think, is the scale of the recovery potential for Europe’s timber industry. There are likely to be two main thrusts. Firstly, through the ‘trickle-down effect’, higher global sawnwood market prices will benefit all producers in Europe – and offset at least some of the rising cost trends in sawlogs.
Secondly, there will be opportunities for market re-positioning and consolidation among Europe’s existing sawnwood producers.
We think higher volume larger scale producers in Sweden and Germany will profit most, from market diversification into China/East Asia commodity markets and eastern US markets for high value square edged timber. There is a looming supply void in Canadian higher grades. Europe can capitalise!
Smaller scale, higher unit cost, independent producers in Europe will find new markets domestically and in export markets. Middle East North Africa (MENA) markets continue to grow – and require a rising volume of not only commodity grades but also special sizes and value-added products.
Overall, we believe, now is an excellent time for the European timber sector to position itself to benefit from the next surge of globalisation and ongoing restructuring of the softwood sawnwood industry.
Market price indicators
The best, and most impartial, indicator is market prices. North American lumber prices in the 1990s were lower than they should have been – because Canadian sawmills (about onethird of US total supply) enjoyed a substantial exchange rate gain on US sales. Canadians, striving for market share gains, drove prices lower. US sawmills lost competitiveness because of this, and because of their smaller scale and higher unit costs of manufacturing.
The US housing bubble in 2002-2006 created peak lumber capacity profits but since then, North American lumber capacity has declined between 20-25%. Recent closure announcements include those by West Fraser and Canfor.
Capacity closures alone would have helped stabilise North American and global prices – but they don’t account for the sharply rising price trend since 2007. This is directly attributable to two factors. First, there has been a huge (and most likely sustainable) surge in import demand from China and other rapidly growing emerging markets in Asia. Second, there is a shortage of economically accessible trees.
China’s imports of logs and lumber will reach new record highs in 2013 – and, we forecast, through 2016. There is also a shift away from logs to softwood lumber, based on log export supply restrictions by Russia (now a very large supplier of lumber to China).
There are also expected to be constraints to softwood log supply from western Canada and the US between 2014 and 2016 as North American mills revert to meeting domestic demand.
Canada’s softwood timber supply is the problem. Long before the recent beetle infestation of western Canada’s pine forests, Canada’s capacity to meet the future needs of domestic and export markets had already peaked and was declining. Canada’s Crown (ie publicly owned) forests, which account for the bulk of Canadian timber supply, faced declining harvesting prospects.
Quebec, Canada’s second largest producer of softwood lumber, is a good example. Overharvesting meant that, to achieve sustainability objectives, provincial governments reduced allowable cuts. British Columbia’s devastating pine beetle epidemic (killing nearly 70% of BC Interior region pine forests) is now forcing sawmills to close – as well as rationalise the remaining provincial timber supplies and consolidate (www.gov.bc.ca/for).
The good news for Europe’s timber industry is that, for the first time in its 150-year history as a source of low cost, high quality, coniferous sawnwood, Canada has exhausted its ability to meet fully the combined needs of rapidly growing emerging markets in China and the Pacific Rim – along with the recovering needs of its traditional customers in North America.
Because of harvesting regulations, most Canadian sawmills cannot do this even at significantly higher lumber prices than those prevailing today. Supply from Canada is inelastic – and, at times during the next few years of global recovery, will become insensitive to price rises.
