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Is the Super Cycle Coming?

A financial graph is a great tool to show where we’ve been, but we may need to look to the stars to see where we’re heading. Over 260 forestry executives and top industry financial analysts from around the world gathered in Vancouver for the May 9, 2012, Global Softwood Log and Lumber Conference, which was part of a five-day event entitled the Global Forest Products Leadership Summit 2012, to discuss the issues facing wood markets in the upcoming months.

During the one-day meeting, the catchphrase of the day was “super cycle” and the question of the day was “when”? And the most that anyone could agree on was that yes, we are finally entering that long sought-after upward cycle, albeit slowly, but there will continue to be obstacles in the course ahead. No one was willing to commit to a precise date of just when we will reach those peak times again.

Over 250 global forestry executives attended the Vancouver event held May 9.

The conference, hosted by Vancouver’s International Wood Markets group, brought together speakers representing worldwide markets and lumber producers from Canada, the U.S., China, Russia, the Middle East, Finland and other parts of Europe, Chile, New Zealand and Australia.

During opening remarks referring to the up-cycle, Russ Taylor, president of Wood Markets, admitted that “we are tired of talking about it right now… but we believe that we are setting up for a bull market – a super cycle – but it’s difficult to predict just when it will get good going forward.”

Vancouver, B.C.-based Reid Carter, managing partner of Brookfield Timberlands, which manages over 2.5 million acres in the U.S., Canada and Brazil, provided an overview of current North American marketplace dynamics. Carter cautioned that as the North American housing markets rebound, the U.S. will be competing for supply currently heading to China.

Carter agreed that we are indeed “bullish about our outlook for structural softwood timber and lumber, despite the reduced economies of wood supply” and he was optimistic that technological advances will help during the recovery as companies create higher value out of lower inputs. His recommended strategies to manage for success? To reduce risk, to make sure employees are engaged and involved at every level, to ensure a strong balance sheet, to manage the scale of operations over multiple jurisdictions on both sides of the U.S.-Canadian border, and to be involved in lobby groups. Carter predicts that there will continue to be “tremendous volatility over the next three to four years, that 2013 will be better, 2015-16 will be very bullish, and that we will have quite a strong future ahead.”

Russ Taylor, president International Wood Markets group, kicks off Global Wood
Conference in Vancouver.

Taylor provided the group with an overview of global lumber trends and outlooks, briefly outlining the U.S. housing collapse, the global recession, the European sovereign debt crises, and the newly announced reduction to the Russian log export tax taking effect in August 2012.

Taylor says that mill technology and flexibility will continue to be a key advantage for producers, and stressed that attention must be paid to Russia as its log exports now account for more exports to Europe, China, Japan and the Middle East and North Africa (MENA), than exports from North America. Russia has an annual harvest of 150 million cubic metres per year, and an annual allowable cut (AAC) of 550-plus million cubic metres/year.

The attendees were curious to see photos of the rapid advances in China’s sawmills. Taylor’s recent Asian visit highlighted that demand for lumber there is not slowing down and in fact, China is currently building the largest sawmilling site in the world. It will consist of 18 buildings with 10 saw lines in each. No longer the single workman with a rough saw on the ground, these new sawmills house the latest technology in enclosed structures, with full lighting and the most advanced equipment, meaning that each line can run two full shifts with a capacity requiring an unprecedented number of logs. This major project is expected to reach completion within the next 12 to 18 months.

China’s David Zu, general manager of Shandong GuoFanZeHai Import and Exports Co. Ltd., a softwood log and lumber importer, distributor and sawmill company, provided an overview of China’s softwood log market. Zu says that China’s main ports can consume 1.2 million cubic metres of softwood logs per month and predicts that there will not be any major declines in import volumes during the next three to five years.

Gerry Van Leuwan, vice-president of the Wood Markets Group, relayed statistics to illustrate China’s growing role as a wood producer. China’s middle class is expected to double in the next 10 years, reaching a whopping 350 million by 2025 (that’s more than the entire population of the U.S.) and he explained that the government continues to push for better housing and a higher standard of living for most of its population, which explains some of the huge appetite for wood. He also says that Chinese sawmills have the lowest production costs in the world and are expected to process more and more logs in the future.

Slava Bychkov, managing director, communications, of Ilim Timber, based in St. Petersburg, Russia, provided a unique perspective regarding Russian timber exports. He spoke about the similarities between Canada and Russia as a supplier to both China and European markets. He noted that during the recent economic downturn, the company found, in its quest for new equipment, that it was cheaper to buy entire companies and reconfigure components to make new Siberian sawmills. Bychkov said Ilim also recently purchased two of Tolleson Lumber’s mills in the U.S. state of Georgia to produce southern yellow pine for China.

The Middle Eastern market outlook was summarized by Mo Amir, general manager of SPF Precut Lumber, of Port Coquitlam, B.C. According to Amir, Middle Eastern lumber consumption volumes have remained stable from 2007 to 2011. He says that Saudi Arabia has poured $400 billion worth of stimulus money into its economy following peak oil prices of 2011, which helped to spur lumber demand. Due to factors such as these, Amir says that although Middle East wood consumption may be modest by worldwide standards, it still remains a strong market for Canadian exporters.

Paul Quinn of RBC was a familiar speaker to most attendees. He noted that consumer confidence is increasing, which is a huge driver for single-family housing starts. He offered a favourable outlook for 2014, and went so far as to say markets will peak during 2016, based on current indicators such as the foreclosure rate coming down, new signs of marketplace stability and trends. To the delight of the crowd, he hinted at some strong possibilities for a few good stock picks relating to Canada’s lumber producers.

Hancock Timber Resource Group’s Brent Keefer, director of economic research and resource planning, covered the U.S. log supply side issues.

Chris McIver, vice-president lumber sales and corporate development at West Fraser Timber, says that the company’s focus has long been on Asia, but that the U.S. remains a huge priority in what has currently been the longest housing trough in history. His opinion is that the market recovery will be “slow and bumpy.”

B.C. timber supply consultant Jim Girvan, president of M.D.T. Management Decision and Technology Ltd., provided highlights from a recently released report on the B.C. mountain pine beetle, noting that eventually 800 million cubic metres of pine in British Columbia will be affected, and that as of 2011, 700 million cubic metres is already dead. Girvan says, “The longer the timber has been dead, the higher the recovery costs and the lower the recovery volume will be. Lumber prices will need to be higher and higher to break even – the longer this dead timber remains unharvested.” Girvan referred to the recent B.C. government “leaked report” and the government plans to mitigate the impact of future harvest level reductions. Even so, Girvan says that significant opportunities in B.C. remain to access substantial amounts of timber, despite the current pine beetle problems.

Olle Berg, senior vice-president, marketing and sales overseas and distribution, of Finland’s Stora Enso spoke about the European lumber and log outlook. Berg feels that European construction markets have now bottomed out and gradual increases will be seen from 2011 to 2012 and again in 2013. He says that the European markets remain supply driven as they wait for recovery.

The Wood Markets summit concluded with speakers Charles Enso, corporate affairs and marketing director, of Arauco, based in Santiago, Chile, and Robert Eastment, director at Tasmanian company IndustryEdge.

Although many of the speakers tiptoed around giving a specific date for full market recovery, the overall feeling of the conference was optimistic that a bull market lies just ahead.

July 3, 2012  By Sandra Tice

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