Industry News News
North America/Global Developments

New Developments
As is usual with the wood products industry and markets, there are a number of new developments that could be game-changers in the short- to medium-term. Some of the more recent developments now undergoing assessments include the following:

• The supply impact of expanding Chinese demand for lumber (as opposed to logs) is a continuing development with huge implications. Most industry players that are not close to the developments in China do not seem to be aware of how big an impact this is having – and will continue to have – on North American lumber supply and prices. China demand is helping to create a “floor price” for W-SPF #2 Structural & Better lumber, and is impacting the cash and futures markets. Further details can be found in WOOD MARKETS’ China Book – Outlook to 2015.
• The recent reopening of the Canada–U.S. softwood lumber dispute over British Columbia’s pricing method for harvesting mountain pine beetle-damaged timber is a development with major implications, and one that is causing some new uncertainty. Should there be some basis for this action such that penalties are imposed, then the potential supply disruption from B.C. could cause a spike in North American lumber prices.
• On January 1, 2011, California building codes will require dry framing lumber with less than 19% moisture content. This will somewhat impact green Douglas fir and hemlock mills, and create an advantage for SPF (and maybe even SYP).
• Ongoing U.S. Issues
• The status and likelihood of a recovery with the U.S. economy, including the following:
• GDP growth rates;
• Unemployment rates;
• Consumer and investor confidence; and

Interest-/inflation-rate trends.

Housing-Market Issues
(To be covered in WOOD MARKETS 2011 – The Five-Year Outlook for North America Wood Products):

• U.S. housing prices and inventory levels for new and existing homes.
• The “shadow inventory” of homes foreclosed by banks that are not yet on the market.
• New residential housing starts: Since they are a key driver of wood products consumption, the rate of housing starts will be directly proportional to the fortunes of commodity structural lumber and panel producers.
• Future levels of mortgage defaults and housing foreclosures.
• Bank requirements for financing new mortgages.
• The role of housing market speculators going forward.

Timber Supply Issues

• B.C.’s mountain pine beetle (MPB) epidemic and the evolving lumber quality/economics, including lumber appearance issues and MSR values (this is covered in detail in WOOD MARKETS’ BC Interior – MPB Impact to 2028).
• MPB timber outbreaks in other parts of the western regions of North America, including South Dakota, Wyoming, Colorado, Montana, Idaho, Alberta, etc.
• The role of timber investment management organizations (TIMOs) in North America in selling timber versus the traditional, integrated company model of operating timber and sawmills as a single unit or profit centre.

North American Lumber Industry Developments

• The ramp-up in closed sawmills and their operating rates as lumber demand slowly rebounds.
• The growth of eastern Canadian lumber as it scales up slowly following ownership changes and mill restarts.
• The role of the mills in the U.S. South and Pacific Northwest to take market share from Canada as its output drops (expected about mid-decade) as the MPB causes many mill closures in British Columbia.

Market Developments

• Supply-chain developments following the major bankruptcies and dislocations that occurred to large players as a result of the housing-market collapse. This caused inventory gaps in early 2010 and a similar development could occur again in late 2010 or early 2011 with inventory buying creating some price spikes again.
• Softwood lumber export market opportunities continue to develop in China, as west coast mills continue to ship expanding volumes of low grade and also higher grade lumber – a trend that sees no slow down for a number of years!
• Softwood lumber exports continue to expand to North Africa and the Middle East – the issue for North American mills continues to be freight rates and logistics, but the market is rebounding.
• Softwood lumber opportunities are also looking up for the UK, as European log prices are now settling in at up to € 100/m3 (US$140/m3) with no signs of going lower in 2011. This should help to create a healthy price spread with U.S. prices and favour East Coast exports.

New Revenue Models

• Wood pellets, which add value to sawdust, shavings and other residual wood fibre.
• Bio-energy, which utilizes bark and waste wood to improve mill economics.
• New-product opportunities, such as cross-laminated timber, engineered wood products and various specialty or consumer products to differentiate away from commodity structural lumber and panels.
• Products to meet “green building” specifications and access a new market segment.
• Certified timber and lumber, which still represents a market opportunity given that it allows producers and distributors to differentiate against non-certified suppliers.

Global Developments

• The impact of the current European economic crisis on global markets.
• The Russian log export tax: The current 25% tax has already caused huge supply dislocations, and an escalation to 80% can occur at any time the Russian government sees fit to implement the proposed increase (this scenario has been covered off in WOOD MARKETS’ The China Book – Outlook to 2015).
• Russia’s potential growth in lumber export markets as new investment steadily occurs.
• Global sawnwood competitiveness: The pendulum continues to shift between regions, creating winners and losers (this entire topic will be addressed in WOOD MARKETS’ upcoming Global Sawmill/Lumber Cost Benchmarking Report 2010/11 – 5th Edition).
• Legality of timber and lumber supply is still a major issue in Western markets.
• Understanding the dynamics of North America and global supply and demand trends will be a key topic at WOOD MARKETS’ Global Wood Products Industry & Market Conference May 10, 2011 in Vancouver.

North American Panels

• A glut of OSB capacity remains curtailed, and how the phasing-in of mill start-ups occurs will directly impact the dynamics of the market.
• The ongoing challenges and niches for plywood as it looks for business beyond sheathing and fends off imports from South America.
• A shortage of fibre for the production of MDF and particleboard continues to be an issue due to increased competition from wood pellets and co-generation plants.
• The impact of CARB and MACT regulations on MDF and particleboard mills will be another issue for the sector to deal with in the foreseeable future.

China Market Trends
And just to finish off, if you are not tracking developments in the Chinese market, here are some further reasons to look harder:

• In general, China’s consumption of timber material is expected to increase by 10% every year for the next 4-5 years and the import volume of North American softwood logs and lumber is expected to drastically increase by up to 100% annually over the next several years.

Chinese importers are very confident of their markets and would like to find more softwood log and lumber suppliers from offshore, providing more competitive materials compared with Russian wood.

According to the statistics from China Customs, China forest products import & export value totaled at 44.7 billion USD during the first half of 2010, up 41% from the same period in 2009.
China’s forest products export value was 22.3 billion USD, an increase of 33% compared with the first half of 2009. The export value has already exceeded the previous peak volume in the same period of 2008 to a new record high point.

China forest products import value rose 51% in the first six months of 2010 as compared with the same period in 2009.
The trade value between China and major partners in the first half year of 2010 has increased quickly:

• trade value with USA reached 6.6 billion USD, up 43%;
• trade value with EU reached 6.1 billion USD, up 34%; and
• trade value with Japan reached 2.5 billion USD, up 32%.

As can be seen from the details shown above, there are a wide variety of issues and developments that have emerged, are in the process of emerging, and will emerge as we move forward. These and other topics of significance to the global wood products industry will be featured in WOOD MARKETS ongoing research and upcoming reports and publications.

By Russ Taylor, President, International WOOD MARKETS Group Inc., Vancouver, B.C. • www.woodmarkets.com