2019 lumber market outlook
By Russ Taylor
Jan. 3, 2019 – After surviving a global slowdown in 2015, world lumber markets became favourable as a general trend of rising prices took hold – up until the second half of 2018, that is, when the trend reversed in almost all markets. What happened?
By Russ Taylor
Many factors combined to cause two contrasting scenarios: too little supply with rising prices in H1/2018, especially in the U.S., followed by too much supply with declining prices by the end of the year. Delayed shipments occurred first in the U.S. market, mainly the result of weather delays from B.C. (and other factors); this inelastic supply led prices to soar to record levels by mid-year. In the second half of fiscal 2018, the opposite occurred: shipments swamped the market, plunging prices by 50 per cent. While average prices for U.S. structural lumber in 2018 were the highest ever recorded, it is still a tale of two half-years. The outcome is that higher-cost mills in western North America have been curtailing production to contend with below-cost prices, but overall supply and demand fundamentals continue to look reasonable for 2019.
As a result, both the Canadian and U.S. divisions of FEA are forecasting a pleasant surprise in lumber pricing in 2019; in fact, the second-highest average annual levels could be seen. This may be a difficult scenario to fully grasp given the lows reached in December 2018, so here is the analysis behind our conclusions.
All global markets – including the U.S., Canada, most of Europe, Japan, China and much of Asia – were good to strong in 2017, and even better for the first two to three quarters of 2018. As in previous years, the only one that remained consistently unsettled was North Africa (particularly Egypt and Algeria). The U.S. saw solid growth again in 2018 (the case since 2010), but supply dislocations – forest fires, hurricanes, cold winters, railcar delays, etc. – and other developments led to extreme volatility in both lumber supply and prices throughout the year.
There are always various change factors at work that can lead, either directly or indirectly, to unpredictable swings in lumber supply, demand and/or prices, and this was precisely what happened in 2018. Until the point at which prices crashed, import duties on Canadian lumber shipments to the U.S. had shown no effect on Canadian mills; by Q4, though, many western Canadian mills had been curtailed due both to the duties and higher log costs in British Columbia. Of course, markets can be complicated, and 2018 proved this yet again.
Total global softwood lumber consumption in 2017 recorded a gain of 1.9 per cent versus 2016, mainly attributable to increases in North America and China. The U.S. achieved substantial lumber consumption growth (+3.7%) that year, as did Canada (+3.8%), but China enjoyed the best results (+13%).
For 2018, global growth in lumber consumption is estimated to have gained about 2.1 per cent, moving up to 341 million m3 (144.5 billion bf net, or 201 billion bf nominal) from 334 million m3 in 2017. Results are varied, with the U.S., Canada, Europe and China all expected to post gains and Russia and Japan seeing small declines.
In 2019, all major consuming regions are likely to record gains, with the U.S. and China set to lead all major countries (again) with increases of about seven per cent each. Other countries (Canada and some European nations) should enjoy moderate growth, while Japan and the CIS (Commonwealth of Independent States) countries are expected to record small demand declines due to their softer economies and housing-market easing. Global softwood demand is projected to reach 350 million m3 next year, an increase of 2.8 per cent from 2018. The outlook for 2020 calls roughly for more of the same, with demand expanding to 359 million m3 (+2.4%).
Global softwood lumber production trends this year should almost mirror the pace of consumption – up 2.4 per cent to 342 million m3 (145 billion bf net, or 201 billion bf nominal) versus 2017. For 2019, global production is forecasted to grow by 2.2 per cent (to 349.5 million m3). A continued rebound in U.S. production will have a sustaining influence on worldwide production next year: our forecast calls for an impressive gain of up to 4.5 per cent in the U.S. and little advancement in Canada (with the latter potentially diminished by the outcome of U.S. import duties). As well, this will be timed to a likely drop in the B.C. Interior’s timber harvest due to an erosion in the economic value of the remaining mountain pine beetle-killed timber. Smaller gains are likely in other regions, with only Japan possibly recording a negative result.
In 2020, we foresee North American production showing a similar trend to 2019, with the U.S. exceeding five per cent as mills there ramp up amid a one per cent erosion of Canadian production (perhaps more if there are mill closures in the B.C. Interior). Total European production should expand slowly: an increase of just over three per cent is estimated for 2018, and this is expected to drop to around one per cent in 2019-20 as lumber exports to the U.S. and China slow. One of the wild cards in 2019 and 2020 will be the health of export markets in Asia (including China and Japan), the Middle East and North Africa, in terms of their ability to sustain demand growth and further tighten the global supply base.
North American demand
You would need to go back to the late 1990s to find a U.S. economy that is humming along as nicely as the current version. However, U.S. residential housing construction (particularly single-family) is sluggish and continues to punch far below its weight. This underperformance is glaring: more than eight years past the cycle peak, the ratio remains near recession levels. And, although multi-family is doing better, it’s not as if we’ve seen a migration of any great magnitude: the multi-family ratio remains slightly below its long-term average. We note that the latter’s improvement appears to be near a cyclical peak, but it still has room to run given that U.S. housing stock is ancient (the median age of an owner-occupied home has risen from 27 years in 1993 to 39 years in 2015) and the supply of new homes is limited.
Nevertheless, housing starts should continue their upward momentum over the next several years, but the risks have tilted decisively to the downside in the near-term as several high-frequency indicators flash red. Our forecast is for starts to average 1.32 million units in 2019 and 1.4 million plus in 2020 (versus 1.26 million in 2018).
Based on slowly improving housing starts and strong gains in repair and remodelling (R&R), lumber consumption should increase in 2019 from the levels achieved this year. Growth in U.S. domestic softwood lumber consumption is expected to continue next year and well into 2020 as the U.S. economic recovery (and particularly housing) builds momentum. While there are mainly supply-side constraints to a rapid ramping-up of the housing construction industry’s building capacity, we expect demand to grow slowly but steadily. Our forecast is for U.S. softwood lumber consumption to approach 52 billion bf in 2019 and 55 billion bf in 2020.
Canadian consumption has remained positive in every quarter since 2015, but our forecast is not as robust as it once was: with high home prices limiting demand for new housing, we estimate Canadian consumption growth at just 3.3 per cent in 2018, and forecast 2.5 per cent growth in 2019 and 3.3 per cent in 2020. R&R markets will benefit from years of strong home sales as Canada’s manufacturing sector is bolstered by weakness in the Canadian dollar.
Offshore imports grew at an average year-over-year rate of 44 per cent in the past four quarters. However, recent price declines have slowed growth from 69 per cent year-over-year in Q4/2017 to 22 per cent in Q3/2018, and an estimated 13 per cent in Q4/2018. We expect decent growth through the forecast period as rising U.S. consumption and capacity limitations in Canada – as well as improving prices and a strong U.S. dollar – open the door to more European imports in 2019 and beyond; this will be helped particularly by the massive spruce bark-beetle salvage program. Our forecast for offshore imports is conservative: +29% in 2018, +8% in 2019 and +16% in 2020.
North American supply
North American production has grown steadily since 2009 as a result of increasing demand in U.S. housing and all other end-use segments. Higher prices in the U.S. limited exports for both American and Canadian companies during the first three quarters of 2018, and this has led to a fifth consecutive year of declining net trade. Reduced exports and rising output by North American mills caused more shipments to be directed to the U.S. In addition, there was another significant rise in offshore imports to meet U.S. demand. With more than 50 Canadian-owned mills situated in the U.S., and amid Canadian import duties and stronger prices in 2018, a flurry of capex projects has continued to expand existing capacity. As well, there is a steady stream of announcements for greenfield/brownfield mill projects that will add up to four billion board feet of new lumber capacity in the U.S. South.
Canadian lumber production should reach 28.3 billion bf in 2018 (a level similar to 2017). Lumber output from the B.C. Interior peaked in 2016 at 12 billion bf, yet it is still expected that three to five sawmills (or equivalent volume) there could close by 2025 (timing unknown). Ontario and Quebec also continue to face longer-term timber supply issues as a result of legislated reductions in annual allowable cuts on government lands. In addition, the closure of several pulp and newsprint mills, with additional shuts expected, has negatively impacted chip prices in some regions. Nonetheless, lumber production continues to rebound in Eastern Canada from the lows of 2009. Eastern lumber output (including in the Atlantic provinces) should reach almost 11 billion bf in 2018 as a result of favourable U.S. market prices and strong Canadian demand. In 2019-20, these levels should rise slightly as the bite of U.S. import duties is felt (except in Nova Scotia) and the impact of lower Canadian housing starts kicks in.
Canadian exports to the U.S. were 14.3 billion bf in 2017 and slightly lower (14.2 billion bf) in 2018; this was despite record-high prices in the earlier part of the year.
U.S. West output remained in a narrow range of 13.5-14 billion bf between 2013 and 2017, with each region (West Coast, Inland, California Redwood) showing flat production trends. Then, in 2017, a reduction in Canadian imports to the U.S., resulting from import duties, led U.S. West lumber higher – from 2017’s 13.9 billion bf to 14.6 billion bf in 2018. By 2020, lumber production in the region could reach as high as 16 billion bf. This is an aggressive forecast that is subject to both log availability and suitable log/lumber prices.
U.S. South lumber output will continue to expand, possibly moving from 18.3 billion bf in 2017 to over 19 billion bf in 2018 to 21.5 billion bf by 2020. The U.S. South has large volumes of incremental timber fuelling new sawmill expansions and greenfield announcements, and still enjoys some of the lowest delivered log prices, the highest lumber prices, and the best sawmill margins in North America. With restrictive import duties on Canadian lumber now in place and prevailing low timber prices, U.S. South sawmills will continue to benefit.
Canadian offshore lumber exports will slip by nine per cent in 2018 as a result of high U.S. lumber prices that are diverting Canadian lumber from offshore markets to the U.S. Furthermore, U.S. offshore exports have decreased this year, especially to China because of the U.S.-China tariff war. Fortunately, higher demand for southern yellow pine from the Caribbean and China should prevent any serious decline in offshore exports.
U.S. lumber prices
Demand has grown faster than capacity in the past several years, leading the North American demand/capacity ratio to hit 89 per cent in 2017-18. With end-use market activity continuing to grind higher in 2019, we expect demand on North American mills to grow steadily. Our projection is for the demand/capacity ratio to edge up to 91 per cent by 2020 – favourable for lumber prices.
U.S. lumber prices will be lower in 2019 than 2018. There are several reasons for this, but none that are considered cyclical; therefore, we do not expect a repeat of the short-term supply disruptions that caused prices to spike. Following 2018’s record-high prices, we expect to see an aggressive supply response by the industry that should help prices to remain strong by historical standards. While our forecast for 2019 prices includes a sharp decline from those in 2018, prices on average could be in line with 2017’s strong showing.
In 2020, pricing will resume its upward trend. This prognostication is predicated on several factors, including ongoing consumption improvements. Overall, we foresee lumber prices rising again in 2020. Volatility will persist over the next two years for a range of reasons, such as:
- Trade restrictions (20% duties) on Canadian lumber shipped to the U.S.
- The reluctance of dealers and mills to oversupply the market, keeping both log and lumber inventories low.
- Logging/transportation infrastructure attrition (in evidence since 2009) and transportation disruptions.
- Capacity that still exceeds consumption by a substantial margin, meaning that the real limiting factor to production will be log supply.
- Offshore trade, which has become a more important component of North American lumber markets, and its impact on trade flows.
Detailed lumber and panel price forecasts are produced each month in WOOD Markets Monthly International Report. Prices for the benchmark North American product Western SPF #2&Btr, 2×4, FOB mill averaged US$401/Mbf (before import duties) in 2017 – much higher than the US$305/Mbf achieved in 2016 with no applicable duties. Prices in 2018 are expected to average a record US$481/Mbf (before an “all others” import duty of 20.2%). With the collapse in prices at the end of 2018, the average W-SPF 2×4 price in 2019 is projected to be close to US$400/Mbf and should be even higher in 2020. Price forecasts for a wider range of U.S. products, including a deeper dive on demand dynamics, is produced in FEA’s Monthly Lumber Advisor.
This article is extracted from the December issue of WOOD MARKETS Monthly International Report; further summaries can be found at www.woodmarkets.com/publication/wood-markets-monthly.
Russ Taylor is the managing director for FEA Canada (WOOD MARKETS; www.woodmarkets.com) based in Vancouver. International WOOD MARKETS Group was purchased by Forest Economic Advisors LLC (www.getfea.com) in August 2017 and now operates as FEA Canada.