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Relief Will be Slow

The main wild cards impacting the fortunes of commodity softwood lumber and Oriented Strand Board (OSB) are the rates of recovery in the U.S. economy and housing markets, and the eventual return of a healthy U.S. financial sector. WOOD Markets’ ongoing assessment of these critical factors indicates a recovery is coming, but it will likely be slower over the next two years as a result of the housing foreclosure rates and still-high housing inventory levels.

December 1, 2011  By Russell E. Taylor


The buildup in unsold houses continues to be a huge drag on lumber and panel demand. It is likely that housing inventory levels have already peaked, but they may not get back to normal levels until as late as 2011, and will continue to impact new housing starts as a result. The unprecedented plunge in U.S. housing starts — from 2.07 million units at the peak in 2005 to an annualized rate of near 525,000 units so far in the first half of 2009 — has continued to cause lumber, OSB and plywood consumption to plunge.

We foresee total U.S. housing starts reaching up to 550,000 units in 2009 and up to 700,000 in 2010. A housing rebound will occur, but the rate of the increase for 2011 and beyond is very much uncertain at this point. As well, it is our belief that U.S. housing levels in the next decade will be considerably lower than those predicted (or achieved) in the mid-2000s and perhaps closer to the 1.6 million housing level. In any event, this will be dramatically better than the anemic levels of today!

Lumber Trends


Since mid-2006, WOOD Markets’ lumber forecasts for North America have consistently predicted weaker demand, excess capacity and weak lumber prices. However, picking the bottom of the lumber cycle, including the low point in housing starts, has eluded all forecasters.

North American softwood lumber consumption is forecast to slip from 2008’s level of 50.5 billion bf, to 42 billion bf in 2009, a decline of 17% (-8.5 billion bf). This represents a staggering drop of 33+ billion bf (-44%) from 2005. The only good news is that lumber demand appears to be bottoming out in mid-2009, with an increase of 6 billion bf (+15%) likely in 2011 from the low in 2009 (small by historical standards, but in the right direction).

U.S. market demand has taken the full brunt of the housing crisis, bearing a loss of 50% in its lumber consumption (-32 billion bf) between 2005 and 2009. By comparison, Canada had largely been able to escape a major correction until late in 2008. Lumber demand in Canada is now expected to fall in 2009, but a small rebound (+5%) is anticipated in 2010.

Canada’s output is forecast to dip from 2004’s peak of 35.1 billion bf to just 20.0 billion bf (-15 billion bf or -43%) in 2009, with drastically reduced U.S. exports accounting for most of this decrease.

U.S. output has also been impacted negatively: production has plunged from 40.8 billion bf in 2005 to a projected 23.8 billion bf in 2009 (a drop of 17 billion bf or 42%). All U.S. regions have been affected, but the U.S. South seems to have the most favourable log prices and has shown the smallest percentage decline (-35%), versus the U.S. West with an average of -47.5%.

Canada’s market share of U.S. consumption has averaged a remarkably consistent 34% since the early 1990s (due in part to the constraints of trade restrictions), as Canada’s shipments to the U.S. simply grew with the strong U.S. demand cycle initiated back in 1991. However, beginning in 2005, Canada’s market share has slipped steadily and is now expected to bottom out at below 27% in 2009. Exports to the U.S. from Canada peaked at 21.4 billion bf in 2005 and are expected to dip to just 8.75 billion bf in 2009 before rebounding.

European softwood lumber imports to the U.S. peaked at 3.15 billion bf (nominal count; 5.0 million m3, net count basis) in 2005. With lower U.S. prices and rising log costs in Europe, most European shipments (structurally graded dimension lumber/studs) have had to slowly abandon the U.S. market, except for maintaining a beachhead. European lumber exports to the U.S. are likely to be below 600 million bf in 2009, a drop of 80% from 2005. Southern Hemisphere pine lumber imports have not fared well either: the region’s  exports will be off by almost 50% in 2009 from their 2005 peak.

When sawmilling margins are reviewed, as outlined in the biannual Global Timber and Sawmill Cost Benchmarking Report produced by WOOD Markets, Canadian mills did not fare well. For example, in comparing the EBITDA margins at “average” mills between Canada (US$-27/m3, net basis, in 2008 and $-36/m3 in Q1/2009) and the U.S. (US$-3/m3 in 2008 and $-12/m3 in Q1/2009), it was initially thought that Canadian mills would show better earnings than U.S. mills for the first quarter, as the Canadian dollar had weakened by 20% (from nearly US$1.00 to US$0.80) starting in December 2008. However, this was not the case, as the earnings spread remained unchanged versus American mills as U.S. log prices plunged, as compared to steadier Canadian log prices. In combination with lumber export duties as a result of the Softwood Lumber Agreement and weak U.S. demand, Canadian lumber producers are between a rock and hard place. However, the bottom of the cycle is near and better days are coming.

OSB Trends

The high dependency of OSB on the North American housing market is well known, as is the current dreadful state of the industry. WOOD Markets has repeatedly issued warnings that the OSB sector is in grave trouble as a result of the plunge in housing starts and too many operating mills; in our most recent forecast, we continue to expect the sector to remain mired in weak demand and overcapacity. Unless some drastic structural changes occur in the industry, WOOD Markets’ analysis indicates that OSB prices and earnings will be the weakest of all the commodity wood products sectors over the next two to three years.

With up to 75% of all OSB production normally used in residential construction, this had made OSB most vulnerable on the downside to market price shocks created by changes in the housing market and/or the total number of housing starts each year. In contrast, some 30% of plywood is normally used in residential construction projects, partly explaining why plywood’s fortunes, although still poor, have remained better than those of OSB since the end of 2006.

In 2009, U.S. consumption of structural panels is expected to bottom at 21.0 billion sf (3/8-inch basis; 18.6 million m3), down by a whopping 23.2 billion sf (-55%) from 2005’s peak of 41.8 billion sf.
New OSB capacity following the peak of prices in 2004-2005, started coming on-stream just as the housing market was beginning its worst collapse since the Great Depression. Consequently, ongoing closures of OSB mills — temporary, indefinite and permanent — have been the rule since 2006, with two additional mills’ construction suspended as they neared completion in 2008.  

Between 2006 and the first quarter of 2009, OSB closures and indefinite curtailments have totalled 25 mills (about 14.5 billion sf of capacity). This means that almost 50% of OSB capacity was closed temporarily or permanently at the end of Q1/2009, versus the peak industry capacity of about 30 billion sf in 2008. The greatest burden of these closures has occurred in Canada: 10 billion sf of closures at 14 mills. With the
Canadian dollar strengthening again in mid-2009 after a six-month reprieve, the prospects for Canadian OSB mills continue to look tough.

With a severe oversupply of OSB, prices have remained at or below cash costs for much of the last 12 months. This has caused OSB operating rates in the U.S. to fall to about 50% in 2009, while Canadian operating rates have fallen below 40% (based on total capacity). The strong Canadian dollar and higher transportation costs to market are two of the main reasons higher-cost Canadian OSB mills account for some 70% of the OSB curtailments and closures to date.

The net result is reduced output again in 2009, caused by weak housing demand for both Canadian OSB and plywood:

• Canadian OSB: Output (11.5 billion sf in 2006 and 5.5 billion sf in 2008) is forecast to retreat again in 2009 to about 4.0 billion sf before rising modestly to 4.2 billion sf in 2010;

• Canadian OSB exports: These are expected to plunge further, from 10.1 billion sf in 2006 and 4.0 billion sf in 2008 to just 2.75 billion sf in 2009 (a drop of almost 75% from 2006), and potentially rising to 2.8 billion sf in 2010; and

• Canadian softwood plywood: Production (mainly from B.C.) will move lower — from 1.94 billion sf in 2008 to about 1.7 billion sf in 2009 and 2010.

OSB is near its low point in this cycle on production and prices, but in the demand cycle for structural panels, it continues to be a long way off before any longer-term balance with supply can be achieved — given that producers have up to two dozen OSB mills waiting to be put back online!

Note: This forecast is extracted from WOOD Markets’ detailed five- and 10-year lumber, OSB and plywood (and lumber) supply, demand, housing and price analysis. Five- and 10-year forecasts are available for purchase and summaries are available through subscriptions to the WOOD Markets International
Monthly Report.


International WOOD MARKETS Group Inc. is Canada’s largest wood products consulting firm. Its consulting team has provided industry and market expertise in the solid wood products field to its industry clients since 1993. The company delivers market plans and business strategy as well as other consultative services to companies in North America and to global offshore companies. The firm also publishes a number of strategic industry multi-client reports including its landmark WOOD Markets Monthly International Report (since 1996). Further information is available at www.woodmarkets.com.


MBA  President, International WOOD MARKETS Group Inc., Vancouver, B.C. Canada,  retaylor@woodmarkets.com

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