Out on a Limb
By Bill Tice
It doesn’t seem that long ago that people were asking, “What are subprime mortgages?” Unfortunately, today it is a term we all know only too well. This is especially true in the forest industry, where the trouble caused by this high-risk lending category has caused a severe decline in the ever important housing start numbers that dictate the ups and downs in the production and sales of lumber and other wood products, such as plywood, OSB, LVL and MDF.
By Bill Tice
When we first started to see signs of trouble for the forest industry in 2006, many people were somewhat optimistic about the length and severity of the current downturn. Some were even predicting it would be all over sometime in 2008. However, it wasn’t long before statements such as “the perfect storm” were being tossed around and those visions of a renewed and refreshed industry returning to profitability were being pushed off until early 2009. Well, here we are in the summer of ’09, and most of the industry is still struggling. Now, many industry experts are saying first quarter of 2010 for the early signs of a recovery. Others are saying it could be longer.
But it’s not just the experts that have an opinion. In forestry dependent towns from Prince Rupert, B.C., to Corner Brook, Nfld., almost everyone is talking about the timing of a recovery. And, they will be more than happy to share their thoughts with you and tell you when they think the worst downturn in our industry’s history will be over. Many have been through tough times before, but even long-term veterans with three or more decades in the industry will admit this is the worst they have ever seen. So just when will this crisis be over and what will our industry look like when the dust settles?
Looking at the housing industry again, news releases and information coming out of the National Association of Home Builders (NAHB) in the U.S. these days is starting to paint a positive picture. They are cautiously reporting an increase in building permits and housing starts in some areas of the country, and they are pointing to a declining inventory of new homes and renewed consumer interest that has been spurred along by government stimulus initiatives and tax incentives as positive signals. The banks in the U.S. are also starting to loosen the purse strings a little and are showing a slight willingness towards lending money again, while at the same time interest rates are at the lowest levels in years. These may all be small steps, but they are steps in the right direction.
You might be wondering at this point if I have an opinion on the topic? And of course, I do. If I was a gambler, I would put my money on a partial recovery by early 2010 with a return to profitability by late next year. I will even go out on a limb here and go as far as to say that sometime in 2011 prices for lumber could reach highs we haven’t seen for some time. I’m no financial expert, but if you look at basic supply and demand from Economics 101 and subscribe to the survival of the fittest theory, you may see why I say this. Quite simply, some producers won’t make it through these turbulent times, while others may have trouble ramping up production to full capacity when things do recover as many of their skilled workers have moved on to other industries. When housing starts return to reasonable levels, fewer producers and less volume in the marketplace means demand should exceed supply, or at least the gap between the two will become much smaller, which should of course drive prices upward.
This current cycle has also created extremely tough times for the suppliers of sawmill and panel mill equipment as demand for their products is down.
But again, the outlook may be quite different for these manufacturers 18 months from now. When the forest products sector does recover, producers may be cautious when it comes to production improvements, but any increase in demand for wood products can only be good news for the equipment manufacturers.
That is what things could look like in the near future, so now back to the question of when might this happen. The answer is quite simply that we may all have an educated guess, a prediction or a theory, but the reality is we really don’t know. To quote Yogi Berra, “it’s not over, ’til it’s over.” He was referring to baseball games of course, but the saying applies quite nicely to this current economic cycle in the forest industry as well.
Bill Tice, Editor