Autumn is the time of year when pundits gather to give their views on the probable outcome for the following year. Being a long-time student, fascinated by the peaks and valleys of the wood products business, I make it a point each autumn to attend an outlook conference.
This year I attended the two-day 17th annual Gruenfeld conference in Seattle, Washington, sponsored by CINTRAFOR (Centre for International Trade in Forest Products, at the University of Washington, Seattle). A common theme running through most presentations was high demand, expanding supply and low prices.
The North American lumber market is a good example of high demand and low prices. Dr Lawrence Promnitz, TimberWest, Vancouver, noted that, despite record demand in 1999 and this year, the market at year-end was in the tank. Lumber prices at the beginning of the year for standard SPF dimension at US$375 per thousand bd ft had fallen to US$205 by year-end, well below the breakeven point for high cost mills. The main problem is oversupply, as production in North America has been increasing steadily in recent years, compounded by increasing lumber imports from countries overseas.
Surplus production
In the past, exports to worldwide markets provided an outlet for surplus production, but that is changing. While Japan is the only market of any size for North Americans now, Japan has not fully recovered from the 1997 recession and demand is still relatively weak. In addition, the market is in transition, favouring dry and engineered wood products rather than the green post and timbers, long the mainstay of North American West Coast shippers.
Since 1988, the US economy has been booming at growth rates exceeding 5%. Housing starts have been at record levels and are expected to reach 1.6 million units in 2000. Record demand levels exceeding 62 billion board ft in 1999 and this year have managed to keep supply in balance with demand.
However, at mid-year, the increasing trend in the monthly rate of housing starts reversed, having finally felt the effects of the slow and gradual interest rate increases orchestrated by the US Federal Reserve, for the purpose of controlling inflation. With the market suddenly anticipating excess supply, prices plummeted.
Housing starts for 2001 are forecast to be 1.5 million units, down from this year, but with repair and remodelling and other consuming sectors holding their own, consumption is expected to be down only 1-2%. Prices are forecast to recover to the US$250-275 level, as current low prices force many mills to curtail, bringing supply closer in balance with slightly reduced demand. But the huge low cost supply overhanging the market will keep prices competitive. Marginal profitability will be the problem faced by the North American lumber industry in 2001.
After the conference, I checked with Charles Widman, of Widman Associates, for his views on the 2001 market outlook and they were much the same. He noted there is strength in demand for the longer term in the US as demographic factors support annual housing starts at 1.5 million units. Widman publishes the twice monthly Market Barometer newsletter which forecasts North American lumber prices. He has recently completed a five-year forecast for the North American market. His website is www.widman.com.
There are some uncertainties for 2001 and the forecast could be worse. The Federal Reserve is endeavouring to a achieve a ‘soft landing’ in slowing down the economy. This, in effect, means a modest slowdown in GDP growth from 5% to 3.5% which will not affect overseas markets. Nariman Behravish, from Standard and Poor’s, said that a hard landing, or deeper recession is still a 30-40% possibility. Higher oil prices are a risk to the soft landing approach, for example. A deeper recession could reduce lumber demand further than forecast and could spread overseas to depress fragile economies such as Japan and South Korea.
There is a further uncertainty for 2001. The US/Canada Lumber Quota Agreement is due for renewal at the end of March. Bob Plecas, of the BC Lumber Trade Council, advised that the Canadian lumber industry is unified on letting the Agreement lapse, and to revert to trading under NAFTA (the North American Free Trade Agreement).
According to Charles Widman, the US Coalition for Fair Lumber Imports will probably apply immediately for a countervail duty. Despite this duty on imports from Canada, eliminating the quota could provide an opportunity for a large supply of low cost lumber in Canada, which has been denied duty-free access to the US market in recent years because of the quota. This could exacerbate an already competitive market in 2001.
Japan continues to be a disappointing market for North American exporters. Japan’s recovery from the meltdown in 1997 has been slow, with GDP growth at only
1-2% annually. Housing starts have recovered only modestly to the 1.1 to 1.2 million units level, some way below the record levels in 1996 of 1.6 million units. Housing is forecast to remain at current levels for the foreseeable future, according to Dr Promnitz. Of greater concern is the decline in traditional wood housing, although 2×4 housing continues to increase and is expected to approach 80,000 units this year, a considerable achievement.
A new construction quality standard was recently introduced by the Japanese government, mostly in response to the poor performance of traditional housing in the Kobe earthquake. According to Paul Boardman, director of CINTRAFOR, the new standard, among other things, requires builders to warranty their residential construction for up to 10 years. Consequently, builders are turning to dry lumber and engineered wood products such as laminated posts and beams and away from green timber and posts, typical of North American lumber exports to Japan.
The new quality standard has given greater impetus to imports from Europe and Scandinavia, which have effectively reduced costs by 20%, as the euro has devalued against the US and Canadian dollars, according to Dr Promnitz. European imports have good quality, are priced competitively and continue to gain market share in Japan.
|
“A new construction quality standard was introduced by the Japanese government, mostly in response to the poor performance of traditional housing in the Kobe earthquake. The new standard requires builders to warranty residential construction for up to 10 years” |
Structural panel products
The market price of structural panel products has fallen steeply since mid-year, similar to that of the lumber market. Prices will recover in 2001 when supply adjusts to new, slightly lower levels of demand in North America.
The production of structural panel products, OSB and softwood plywood combined, have grown 33% since 1990 to 40 billion ft², advised Craig Adair, APA-The Engineered Wood Association. Lower cost OSB has been the driving force increasing its share of panel production from 7% to 50% over the same period, and this will continue with 8 billion ft² of new capacity expected by 2005.
Panel production is now driven by North American consumption, not exports. Europe has been lost to low cost Brazilian plywood and new OSB plants. Japan has not fully recovered from the recession and competition has increased from domestic plywood and imports from China.
It was interesting to hear the analysis by Clark Binkley, Hancock Timber Resource Group. He said that 10 years ago, some high-profile studies predicted that supply would fall short of demand in 20-30 years, creating a wide supply/demand gap. Now the talk is all about oversupply. How quickly things change.
Mr Binkley pointed out that the projected gap was based mostly on natural forests. In his opinion, three things will help close the gap. One is the rapid continuing expansion of plantation forests in South America, the Pacific and Europe which Binkley estimates will constitute 20-35% of operable forests by 2004.
Advanced production technology is another factor which has made it possible to produce quality lumber and panel products from small logs and formerly non-commercial species. Also, technological innovation in modifying present products and developing new products, will make wood products more efficient, stable and stronger.
With plenty of supply available, Mr Binkley suggested that more emphasis needs to be placed on regaining market share lost to non-wood substitutes and promoting wood as a renewable resource for building materials.
Mario Angel from the World Forestry Institute, Portland, illustrated the extent of plantation forests in South America in Chile, Brazil, Argentina, and Paraguay. Now Columbia, Bolivia and Peru are offering incentives for plantation development. Today, Angel estimates there are 8.8 million ha of plantation forest in South America and suitable land for expansion of about three times that area.
In New Zealand, the plantation harvest, currently at 19 million m³, could more than double by 2030, according to Lawrie Halkett, New Zealand Pine Manufacturers. He also noted that Australia, which at one time was a major importer of lumber and timber, is now virtually self-sufficient in fibre as a result of its plantation forest development, and is exporting wood chips to Japan.
A most interesting presentation by Jan Hagstedt, Nordic Timber Council (NTC), brought home the impact of oversupply on profitability. In Scandinavia, he noted, the margin between delivered log cost and export sawnwood price FOB at the mill was narrowing steadily and squeezing profits, as demand in Europe remained static and production continued to increase. Since 1994, the price trend dropped 21%.
Oversupply, he said, has become a global phenomenon as other regions with plantation forests have increased production and will continue to do so, while demand increases rather slowly at about 1-1.5% per year.
The forest industry has focused too long on competing within itself, Mr Hagstedt said. What must be done, if the industry is to be profitable, is to build a bigger market for wood. We need, he said, to create a bigger cake instead of concentrating on cutting up the current one. This should be a goal common to the global wood pro-ducts industry.
This thinking has led the NTC to start a campaign in the UK to increase the demand for timber. It has also sent a study team to China to determine the potential there.
To be fair, other speakers mentioned the need for promotion. Clark Binkley was one. Another was Bob Plecas who said that the millions in legal fees that Canada and the US spend on wrangling over lumber market share would be much more productively spent on promoting the industry’s responsible stewardship of the forest and regaining share lost to non-wood products.
To me, the message is not new: more promotion of wood by industry associations was probably done 50 years ago than is done today. But what is new, is that the Scandinavians, at least, are doing something about it.
Related Files
US Lumber Price Trends
