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Global Lumber Outlook 2012

Uncertain global economics and a stubbornly stalled U.S. housing market both foreshadow another tough year for global wood products producers.  The following excerpts from WOOD MARKETS 2012 – Outlook to 2016 offer an overview of current issues in the global lumber trade.

Global Economic Challenges
Following the recession of 2009, the global economy expanded in 2010 and into the first quarter of 2011, and then slowed abruptly. Major global issues and risks include rising inflation, higher commodity prices, political uncertainty in the U.S. regarding debt reduction, sovereign debt uncertainty in several countries in the eurozone, and the recovery efforts following the March 2011 Japanese earthquake and tsunami. The International Monetary Fund (IMF) has forecasted global GDP growth of 4.0% in both 2011 and 2012, but this now seems optimistic.

In the U.S., high levels of unemployment, foreclosures and “underwater” mortgages have continued, and in some instances even intensified. With these multiple headwinds, the U.S. economy is not expected to make a pronounced recovery until 2013.

Emerging economies, particularly in Asia, have recovered from the 2009 recession and are showing growth rates much stronger than those of the developed economies. This trend is expected to continue despite the effects of reduced trade with Europe and North America.

Hobbled North American Demand
U.S. housing starts are expected to end the year slightly below the 587,000 units started in 2010 and well below the estimated underlying longer-term demand of 1.5 to 1.6 million units. It is this prolonged housing slump that has stalled lumber industry recovery.  In contrast, Canada’s housing market has been relatively stable, dipping in 2009 and recovering most of its lost ground in 2010. Its lumber consumption has hence also been healthier.

WOOD MARKETS is watching a number of key indicators for signs the U.S. housing market may be turning:

  • Inventories of new and existing homes for sale in the U.S. have slowly crept lower to about 6.5 and 8.5 months’ supply respectively, down from a peak of 10 to 12 months’; this figure needs to retreat even further to a more normal four months’ inventory.
  • Similarly, the absolute number of unsold U.S. housing units has been stubbornly slow to decline, holding at 3.7 million (both new and existing homes). It will need to drop to a more traditional level of 2.0 to 2.5 million units before new construction picks up significantly.
  • The “shadow inventory” of houses in (or soon to enter) foreclosure is presently estimated at 1.6 to 1.7 million units.
  • U.S. home prices will need to bottom out so that they can move higher; this will enable homebuyers to regain confidence, and allow house sales to begin moving again.
  • The number of vacant homeowner-occupied and rental housing units is about three million above the historical trend and rising. This number will need to fall sharply before builders are motivated to begin building.
  • The rate of household formations is now about a third of what it was during the market boom of 2000–2007. This low rate of household formations is at the heart of the slow housing recovery, and it will need to recover to more normal levels (e.g., about 1.2 million per year) before the demand for housing normalizes.
  • Improved employment prospects will be key to an improved housing market, as adults currently living “doubled up” will be able to form separate households only when they have real jobs. Hence, a return to more historical levels of unemployment (e.g., 6% to 7% versus the current 9%) will signify that a housing market improvement is on the way.

North American Production Constrained
Following the 42% decline between 2005 and 2009, U.S. softwood lumber production grew 5.5% in 2010 to 24.9 billion board feet (40.0 million square metres – net). It is anticipated to grow an additional 5.4% in 2011 and then accelerate in 2012 and beyond.  The U.S. South, with its plentiful timber supply, is expected to lead the recovery.

Canadian softwood lumber production is forecast to increase only 1.1% in 2011 and 7.3% in 2012. Asian export opportunities and plentiful (largely beetle-killed) timber have given western producers an advantage. Canada’s production will also rebound over the next four to five years until the full impact of the mountain pine beetle epidemic in B.C. finally reduces the timber harvest and lumber production. Other timber-supply constraints, including the drop in the annual allowable harvest in Quebec and Ontario and the pending impact of the mountain pine beetle in the Prairie provinces, will force the lowering of Canadian lumber output toward the end of the current decade.

For the North American market, China’s voracious appetite for logs and lumber has become a new wild card. Chinese demand for logs has pushed up costs for some U.S. coastal mills. An additional issue to watch is an arbitration case currently before the London Court of International Arbitration (LCIA) in which the U.S. government claims that the B.C. provincial government underpriced stumpage (the harvesting rights to Crown timber) on large volumes of mountain pine beetle-killed timber that had been harvested in the province. A final ruling by the LCIA is not anticipated until early in 2012.

The overall European wood products market improved in 2011, but many countries (e.g., Spain, Ireland, and now Greece and Italy) continue to sag as a result of the euro debt crisis. Consequently, chronic overcapacity continues to plague the European sawmill sector.

Facing increased competition in a stagnant market, European shippers tried to diversify their products to markets other than the U.S. and Japan (which for many years had been the most important export destinations). North Africa and the Middle East have emerged as major export destinations for European shippers over the last few years, with over 9.6 million square metres of exports sold in those regions in 2010. However, the political situation in North Africa (Egypt, Libya and Tunisia) has become unstable, negatively impacting exports.

In 2011, sawn softwood output in Europe is expected to increase only 1% over 2010. The outlook is for a small increase (2.5%) in European lumber output in 2012.  

Russia has almost 20% of global forest growing stock and is producing some 10% of the world’s sawnwood products. Due to the uncertainties related to forest law, institutional reform and export-duty policies, foreign investments in sawmilling capacities have been slow to arrive.

Russian lumber production is estimated to be 8.5% higher in 2011 than 2010. The bulk of this increase in output is tied to rising Russian exports to China. The recent announcement that Russia will join the WTO leads the way for more change in Russia. While there is some skepticism that Russia will initiate its acceptance promptly, reportedly the move will eventually lead to lower log export taxes, with quotas in place for parts of the year. A lower log export tax is not good for Russia’s domestic sawmills, as they will have to compete for logs that could be destined to export markets at higher prices (or bearing lower export taxes).

New residential housing starts have steadily eroded in Japan due to demographics and the real estate market, moving from 1.3 million in 2006 to only 788,000 in 2009 (-40%). In 2010, housing starts rebounded to 813,000 units. Now, with the rebuilding from the earthquake/tsunami, housing starts have been slightly higher in 2011, and will likely see a healthy increase in 2012 as the rebuilding effort accelerates.

Japanese imports of lumber have declined steadily — from a peak of 12.6 million square metres in 1997 to 5.8 million square metres in 2009 (-54%), but were higher in 2010 (6.6 million square metres; 4.1 billion board feet – nominal dimension count), with 2011 expected to be about 10% higher.

During the last several years, China’s softwood log and lumber imports have increased spectacularly, and the list of supplying countries has recorded big changes and huge growth in the years since 2007 (the year of implementation of the Russian log export tax schedule). Currently, Russia remains the largest softwood log supplier to China, but the supply volume has decreased from 21 million square metres in 2007 to only 13 million square metres in 2010. This gap in log supply has been filled by softwood logs from New Zealand, the U.S., Canada and Australia. Meanwhile, softwood lumber imported from Canada has also replaced Russian softwood lumber as the largest supplier to the Chinese market.

According to China Customs statistics, total imports reached 9.4 million square metres (5.85 billion board feet – nominal dimension count) in softwood lumber for 2010, representing an increase of 47.8% versus 2009. During the first nine months of 2011, Chinese imports of softwood lumber were up over 50% from the same period in 2010. However, an overbuilt housing market, coupled with a credit freeze, have caused a huge buildup in inventories of logs and lumber throughout China, which is now backed up on the docks in origin ports.

While it will likely take at least three to four months to achieve a balanced inventory position in China, the outlook is still very positive, with consumption levels expected to be 15% higher in 2012.


By Russ Taylor, President; and Alice Palmer, Consultant, International WOOD MARKETS Group Inc., Vancouver, B.C. Canada

Extracted from WOOD MARKETS 2012 – The Five-Year Outlook 2012–2016 – see http://www.woodmarkets.com/p_wmbook.html   

Highlights of this report and others will be presented at the second Global Wood Products Industry/Market Conference, Vancouver, B.C. – Wednesday, May 9, 2012.

July 9, 2012  By Russ Taylor and Alice Palmer

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