Global markets stall
By Russ Taylor
June 10, 2015 - In 2014, major global lumber markets achieved differing results, but generally accomplished positive results in the first half of the year, but a much slower and lacklustre second half resulted as demand slowed and production grew. These weak dynamics have continued on into the second quarter of 2015, where too much production has been chasing too little demand in both the U.S. and in China. Despite the often-discussed potential of “lumber super-cycle”, what has gone so terribly wrong? And what lies ahead in 2015 and beyond? As usual, the global lumber markets are complicated and there is never an easy answer!
The major consuming softwood lumber engines of the world increased their demand in 2014: gains were recorded in Europe, the U.S. and China. Offsetting these gains were a falling market in Japan, a weakening market in China in the second half of the year, and volatility throughout the Middle East/North Africa (MENA) markets.
In the key U.S. market, housing starts increased at a much slower rate than predicted or needed (925,000 units in 2013 to 1.03 million in 2014) and there is still a long way to go to get back to the long-term demand of 1.5 to 1.6 million housing units.
On the supply front, Russian log supplies bottomed out in 2013 and showed some increases in 2014. Russian lumber production started to surge later in 2014 as the Russian ruble devalued by almost 50 per cent.
The Canadian log and lumber situation could peak in the next few years as the B.C. Interior and Quebec struggle with wood supply and log quality issues; clearly, this will impact North American supply over time, but when?
As usual, there are global dynamics occurring that will create swings in lumber supply, demand and prices in 2015 and beyond.
Global economic overview
The more advanced countries’ economies continued their slow turnaround in 2014, with European GDP projected to be positive (+0.8 per cent) for the first time since 2011. Further improvements are forecast in 2015 (+1.4 per cent), and most likely higher again in 2016.
In the U.S., the housing and job markets continue to improve, with a lot more upside potential still expected.
The Japanese economy slowed down in 2014 due to the increase in the consumption tax, with GDP projected at just 0.9 per cent (and about 0.8 per cent in 2015 and 2016).
Overall, the advanced economies’ economic growth rate is expected to be 1.8 per cent in 2014 and 2.3 per cent in 2015.
Growth in the emerging and developing countries’ economies cooled in 2014, held back by lacklustre results in Latin America and uncertainty in the CIS (Commonwealth of Independent States, or former Soviet) region. From 4.7 per cent in 2013 and 4.4 per cent in 2014, growth is forecast to improve to 5.0 per cent in 2015.
The 50 per cent decline in oil prices began in June 2014 and was followed by slow and continuous erosion in many other countries’ currencies relative to the U.S. dollar — especially those with oil-production operations.
The Russian ruble took the steepest fall of all at a drop of 46 per cent, while most other countries saw their currencies decline by 14 to 18 per cent.
The greatest impact has occurred since early December, when well over half of the total decline took place for many countries (e.g., eight to nine per cent for Canada, the Eurozone and Australia)
Softwood lumber exports from the Russian Federation were up slightly in 2013 to 19.4 million m3 where China imported 6.4 million m3 of softwood lumber from Russia (34 per cent of all Russian exports) and remained its largest market for softwood lumber. Russia’s reduced log export taxes (implemented in September 2012) have had little impact on log export volumes until 2015, but lumber export volumes continue to surge. Softwood lumber exports from Russia to China in 2014 reached 7.2 million m3 (a 12 per cent increase).
In 2014 and into 2015, more Russian sawmills have started up, as well as more Chinese-operated traditional sawmills and many cant-cutting mills in Siberia. Russian lumber output and exports are expected to increase further in 2015 as cheaper logs from the devalued ruble are increasing the competitiveness of mills located in Russia.
The full picture for many sawmills in Russia requires considering more than just the impact of currency exchange rates. While a halving of the Russian ruble to the U.S. dollar since the summer of 2014 sounds like a potential windfall in export markets, the price of Russian red pine lumber has fallen in a number of key export markets, with any potential bonus from currency gains having been eroded significantly by price reductions. Add in increased Russian railroad tariffs and the higher costs of imported parts and equipment, as well as steeper financing charges, and some of the currency gain evaporates immediately. Therefore, further declines in Russian lumber prices in China are expected to be limited, especially as larger exporting companies begin to dig in on prices in an effort to hold their bottom lines.
Chinese softwood lumber imports increased for the second year in a row in 2014 following the slowdown in 2012. Softwood lumber imports were 17.6 million m3 (7.45 billion bf net, or 11.0 billion bf nominal) in 2014 following 2013’s 16.9 million m3.
Many factors have contributed to weaker demand and low prices in China in the second quarter of 2015:
- Currency devaluations: all US$-based prices are off 10 to 20 per cent for lumber and 20 to 30 per cent for logs.
- Log inventories are very high and have been growing quickly since the end of January;
- The construction industry has been slower;
- Housing industry remains high and prices are eroding;
- Lumber inventories are better, but still on high side;
- Russians are offering cheap logs and lumber;
- New Zealand has dropped its log prices lower;
- Europeans followed the Russian lumber prices down;
- Demand in China remains flat – still significant volumes moving though; and
- Supply is exceeding demand, so prices are lowering.
The impact of the ruble’s devaluation has shown up in the Chinese market, with a ripple effect that that has impacted other key markets, including the U.S. The weaker market situation in China and the supply response to cheaper Russian lumber prices has led to lower log and lumber prices amid a buildup of inventories of higher-cost wood products.
The lumber outlook in China could still be reasonable in 2015, as building activity is still happening throughout most of the country. Softwood lumber is being shipped and consumed at steady levels, but stocks need to be pared back in the short-term. While there is a noticeable and lingering slowdown in the construction market on one hand, there is steadier demand in the decoration and furniture segments on the other. As a result, SPF, hemlock and Douglas fir exporters are being more negatively impacted, while European species and plantation pine lumber (radiata pine, SYP), as well as Russian red pine, are enjoying modest export growth.
Canada was the largest softwood supplier to China in 2012 and 2013, but in 2014 that title went back to Russia (shipping 7.2 million m3 versus Canada’s 6.6 million m3). The Russian volumes are expected to be even higher in 2015, while Canadian volumes will most likely be slightly lower.
U.S. market implications
The U.S. market is expanding as new residential housing starts and construction increase; however, the pace of this increase has been much slower than expected by many (including those in the home-construction industry). As a result, increases in sawmill capacity and lumber production have been rising at a similar or even faster pace, causing lumber prices to languish and drop to break-even levels very quickly in the second quarter of 2015.
Part of the sawmilling capacity has been dedicated to China, and this is especially true for lumber produced from mountain pine beetle-killed timber in B.C., where exports have risen ievery year from 2007 to 2013.
However, there was a slowdown in the second half of 2014 (particularly in the fourth quarter), resulting in total Canadian (B.C.) exports declining by 3.4 per cent in 2014 versus 2013. This reduced export activity has continued so far in 2015 (Canadian exports were off 25 per cent in Q1/2015; U.S. exports were lower by 48 per cent). Given shifting market dynamics in China, the short-term outlook is expected to be volatile, and evolving market conditions within China could be trouble for some exporters.
Wood Markets’ forecast assumes that the U.S. housing market and other demand sectors will continue their slow and steady growth in 2015. It also assumes that, to sell into China and/or the U.S. markets, exporters in Canada and Europe will be willing to lower their U.S. dollar prices even further to obtain more business. Should housing market activity heat up and low field inventories stir up the market, the supply-demand situation could balance out more quickly.
The Wood Markets’ forecast calls for an eventual recovery in China and the U.S. markets by the end of Q2/2015, as mill curtailments and further gains in consumption, coupled with low field inventories, should allow for some much needed improvement. Until that point, all of the currency exchange gains achieved by Canada since July have been lost on lumber exports to the U.S.
With lower prices, the U.S. structural lumber composite has been dropping and Canadian exporters have seen five per cent duties (mills in the West) and 2.5 per cent duties and quotas (on mills in the East) on U.S. exports in April and May and June’s duties should be at least 10 per cent.
The unexpected impact of lower oil prices is now showing up in global lumber markets. Market forces will determine the ultimate result, but it appears U.S. lumber markets will be experiencing some of the global repercussions of geopolitics caused by currency devaluations and changing competitiveness in China, resulting in weak U.S. dollar pricing – for now!
Extracted from WOOD MARKETS 2015: The Solid Wood Products Outlook 2015–2019, and WOOD Markets Monthly International Report.