Raising the Roof
Heading into 2013, the major lumber consuming regions of North America, Europe, Japan and China are each in a different place in their economic cycles. After three years of historically low housing starts, U.S. housing showed rapid improvements in 2012, particularly in the fourth quarter. Starts are expected to double by 2017 from 2012 levels. In contrast, the current economic turmoil in Europe is forecast to keep housing starts and wood products demand stalled for at least the next two years. China, coming off of a real estate market tear that slumped in 2012, is expected to have flat growth until the second half of 2013 when the results of the new Chinese government’s economic plan phases in. Finally, housing in Japan is also on an upward trajectory, as home buyers try to get their homes built before consumption tax increases start in 2014.
Global Demand and Supply
With the variation of gains and losses throughout the main lumber consuming regions, the total global softwood lumber consumption in 2012 gained about 1% over 2011. For 2013, the global outlook is for an improved but still subdued increase of about 2%. Within the global total, some regions will see more rapid growth than others: the U.S. and Japan are each forecast to grow at about 5% in 2013, whereas European consumption is forecast to shrink by about 1%. With shifting fortunes and price differentials will come opportunities for international trade.
Global softwood production trends mirrored consumption trends in 2012, increasing by a mere 0.7%. For 2013, production is forecast to accelerate slightly, by about 3%. A rebound in North American production (to supply the recovering U.S. housing market) will have the largest influence on global production in 2013. North American production is expected to jump significantly (8% in the U.S. and 5.5% in Canada). European production will also rise slightly, even though consumption is forecast to fall. Increased exports to markets in Asia, the Middle East, and North America will absorb the extra volume.
North American Demand
Good news is the word in North American markets: U.S. house prices appear to have stabilized and are rising in many cities, housing starts (although still very low by historical standards) are well on the uptick, and inventories of vacant homes have been gradually receding. 2012 is now being hailed as the turn-around year, from which point housing growth and wood products consumption is forecast to accelerate over the next five years.
U.S. housing is the key driver of lumber consumption in North America. Based on housing starts, lumber consumption for new U.S. residential construction alone is expected to increase nearly threefold from 2011 to 2017. Demand for repair and remodelling, industrial and commercial applications is also forecast to increase steadily. Total Canadian demand will also increase, but at a much slower pace (given that the Canadian housing market appears to be slowing down).
North American Supply
North American production is expected to grow rapidly over the next two years, chasing (but not quite catching) North American demand. Based on WOOD MARKETS’ demand forecast, total North American production is forecast to grow by about 8% in 2013 and an additional 6% in 2014. The lion’s share of this increase is expected to come from the U.S.: shipments are expected to grow by about 10% in 2013 and 8% in 2014. Canadian shipments will grow too, but will be limited by tightening timber harvests in the B.C. Interior, Ontario and Quebec: total production is forecast to rise only about 5% in 2013 and 3% in 2014.
By about 2016, the production capacity in Canada will be almost 10 billion board feet lower than it was in 2005, while both U.S. and export markets are expected to be strong. This will contribute to higher prices and the creation of a North American lumber “super cycle” – something WOOD MARKETS has been forecasting as early as 2007. An element to watch as the market rebounds will be industry’s schedule for putting curtailed lumber production back online as lumber prices improve; imbalances to the supply or demand side may result in periods of price volatility – prices will go mainly higher, but also lower at times.
Housing starts in Japan have begun to edge upwards since the catastrophic March 2011 earthquake and tsunami. This increase has accelerated the growth in softwood lumber consumption: after several years of steady decline, Japanese consumption grew gently each year starting in 2010. Imports are expected to grow by 5% in both 2013 and 2014.
A major factor influencing housing starts in Japan is the upcoming increase to the value-added (VAT) or consumption tax, rising from the current 5% to 8% in April 2014 and 10% in October 2015. Some housing industry analysts are projecting September 2013 to be the last month in which a buyer could order a new home in Japan in order for it to be completed prior to the first tax hike. For this reason, housing starts are forecast to rise in 2013 and then drop marginally in 2014.
Chinese lumber imports continue to be “headline news” for lumber producers around the world. Chinese housing starts are the highest in the world as they currently dwarf the housing starts numbers for Europe and North America. However, the Chinese housing market slowed in 2011 and then dipped slightly in 2012. After posting double-digit growth every year since 2008, Chinese lumber consumption also slipped in 2012 as the housing market cooled.
Softwood lumber consumption in China dropped by about 2% between 2011 and 2012. A slowdown in Chinese construction is responsible for this decline. For 2013, consumption is expected to recover to 2011 levels, with a larger increase in 2014. However, these growth rates do not include any impact from the new government’s economic plan and some stimulus or investment projects from this plan are expected to allow for higher demand levels than suggested above. Further details are available in WOOD MARKETS’ The China Book: Outlook to 2017.
Europe and Russia
The present economic uncertainty in Europe has hit sawmills hard. As in North America, construction is a key market driver for consumption of sawn softwood, and the housing/building sector in both Western and Eastern Europe is expected to remain very fragile in 2013. However, the potential for increased exports to Asia, the Middle East/North Africa (MENA) region, and the U.S. will allow production to remain relatively flat in 2013, and then rise more significantly in 2014.
Russia joined the WTO in August 2012 and has been in the process of replacing its previous log export taxes with new quota volumes and a lower tariff rate. The new rules, once they are completely phased in, are expected to marginally increase export log availability over the short term. However, Russian lumber production is forecast to increase as a result of some new Russian sawmills starting up and the increasing importance of Chinese mills in Siberia.
Increasing Prices, Shifting Trade Flows
The global balance between supply and demand is expected to shift over the next few years, from an oversupply of lumber to an undersupply. While European lumber consumption continues to struggle, North America’s rapid recovery, Japan’s steady consumption, and China’s economic growth engine will drive overall global consumption upwards. North American mills are forecast to increase production, but are not expected to completely keep the pace with increasing demand in housing and repair/remodelling. The increase in North American lumber prices began in 2012, rising from near cost levels near the beginning of the year to a six-year high price by December. Partly as a result of rising prices in the U.S., U.S. export growth slowed in 2012; it is forecast to decline from 2013 to 2017, as higher prices keep more wood in domestic markets.
Canadian production and exports will increase to meet the increasing U.S. demand. Indeed, with prices now above the US$355 Softwood Lumber Agreement threshold (based on the Random Lengths Composite Framing Index), Canadian lumber began entering the U.S. duty-free in January 2013. However, annual allowable cut (AAC) reductions in the timber harvest in Ontario, Quebec, and increasingly, the B.C. Interior, will limit Canadian lumber production to marginal gains in output and nowhere near its pre-recession levels. Toward the middle of the five-year forecast, as North American, Asian, and possibly even European demand all rise, total Canadian production and exports will actually begin to decrease. This tightening of supply precisely when it is needed the most is expected to create an even greater price increase than seen in the 2013-2014 period.
WOOD MARKETS’ lumber forecast to 2017 predicts two distinct price spikes. The first, as discussed in this article, will be driven by demand increasing faster than supply through 2013 and 2014 as the supply chain struggles to keep enough production moving to customers. As high prices attract additional production and imports, supply and demand are expected to more or less balance out by 2015, putting downward pressure on prices in seasonally slow periods. However, continued demand growth in the U.S. and Asia, coupled with a further recovery in Europe and maxed-out production in Canada, will lead to a second supply/demand imbalance as production is once again unable to meet supply. This will lead to a true lumber super cycle in 2016 and 2017 – at a time when prices could really go through the roof.
Excerpted from WOOD MARKETS 2013 - Outlook to 2017 (8th Edition), which offers an overview of current issues in the global lumber trade with outlooks to 2017. The report is published by International WOOD MARKETS Group Inc., Vancouver, B.C. (www.woodmarkets.com).
April 9, 2013 By Alice Palmer and Russ Taylor
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