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North America Softwood Lumber Outlook

From the Softwood Lumber Volume (released in November) of thereport, Wood Markets 2010 – The Five-Year Outlook for North America Wood Products 2010-2014, the highlights include the following:

A positive outlook is forecast, where it is becoming clear that the worst is almost over for the North American softwood lumber market as improving demand in 2010 is expected to breathe some life back into a beaten up industry. While the coming winter of 2009/2010 will likely be a tough one, rising housing starts, lean distribution channel inventories and some lingering government stimulus programs should kick-start lumber demand and even prices. The first five-year outlook report has required considerable investigation into a number of new factors impacting the demand for structural lumber and wood products given the state of the U.S. and Canadian housing markets and the impact of the U.S. and global economies and the recession.

After facing declining markets and prices since 2006, the outlook for 2010 predicts that there will be enough building blocks in place to allow for some much-needed market improvement with rising demand as well as prices. But it is in 2011 – and especially in 2012 and 2013 – that a real housing recovery is forecast to take hold, creating higher prices with significant price volatility occurring as sudden demand surges catch the lumber market by surprise.

The Wood Markets 2010 forecast for softwood lumber outlines a number of structural changes that are occurring in lumber supply dynamics in North America. With permanent timber supply cutbacks in Eastern Canada and the mountain pine beetle infested lumber negatively impacting the economics of processing logs to lumber in B.C., Canada’s lumber production has peaked and may never return to the record lumber output of 35.2 billion bf achieved in 2004. In fact, Canada’s market share of U.S. consumption is expected to remain in the 27% range in the forecast versus a more normal 32-34% over the last 15 years due simply to lower timber harvests and therefore less lumber production. And Canada’s market share is expected to drop even further by 2020. This will provide some much-needed good news for producers in other North American regions, as the U.S. South and the U.S. West are expected to be the major beneficiaries of these changes in Canadian supply dynamics.

There are many wild-cards expected to impact lumber prices in each year of the five-year forecast. A big element impacting the lumber price outlook will be the industry’s schedule or strategy for putting curtailed or even closed sawmill production back online, not to mention the log inventories that companies can, or are willing to build. How it balances or doesn’t balance with lumber demand will show up in how lumber prices move in the next five years. But by 2012 and especially 2013, when demand should outstrip supply at various stages, stud and dimension lumber prices should climb to average an incredible US$200/Mbf or so higher than 2009 levels! The prospects of higher prices will be welcomed by all players in the North American lumber sector, but cost pressures such as rising log costs may not directly translate into major windfalls – but modest profits, yes!

The Wood Markets analysis indicates that a slower recovery is expected initially, with housing starts in 2010 moving higher to the 700,000-unit range from about 575,000 units in 2009. However, a looming deficit in new single-family homes will require a significant surge in U.S. housing starts that is expected to exceed 1.5 million units by 2013 – or go back to more “normal” or long-term housing start levels.

Rising housing starts in the U.S. are expected to occur in 2010 following the Obama government housing

stimulus legislation of 2009 and the development of more normalized housing inventories. These two factors are key in allowing for a rebound in new residential housing starts and increasing lumber demand that is forecast to continue through 2013.

All regions in the U.S. and Canada are expected to rebound with an average annual increase of about 10% expected from 2009 to 2014 as sawmill operating rates improve from dismal levels averaging just 50% in 2009 to near 90% levels by 2013.

Total North American lumber production peaked at 75 billion bf in 2005 and will bottom out dramatically lower at near 43 billion bf in 2009. Steady rises are forecast in output, to well over 60 billion bf in 2013, allowing most remaining mills to resume production at more normal historic levels.

North America 1-inch Board Market

Some highlights from the recent report (released in October), U.S. Board Market Survey, include the following:

• Following the decline in total softwood lumber supply from 2006 to 2009, the board supply has fallen to under 2 billion bf.
• Boards are estimated to account for about 6% of U.S. softwood lumber supply having closely maintained this level over the last decade.
• For 2008, the major supplying region of boards was the U.S., with imports being led by Canada with other volumes from the Southern Hemisphere and Europe.
• B.C. board producers are becoming more concerned that the mountain pine beetle infestation may have an impact on the region’s supply of #2 Common & Better boards due to blue stain and excessive checking/splits.

North America Mouldings Outlook

Some highlights from another report (released in November), U.S. Pine Lumber & Moulding Market Outlook: 2010-2014, feature the following market trends:

• Fashion trends are expected to continue to favour paint-grade mouldings (finger-joint or MDF) over stain-grade mouldings. It is also assumed that the consumer preference trend toward wider, more built-up profiles will continue.
• U.S. domestic moulding production has been declining steadily since 2005 due to the onslaught of imported mouldings, MDF mouldings and, more recently, the overall reduction in moulding consumption.
• Finger-joint moulding consumption is linked closely to the usage with builders and contractors and has the most to gain in the recovery starting in 2010.
• MDF mouldings continue to capture market share from finger-joint over the next five years.
• Solid lineal and plastic mouldings are forecast to remain as premium niche products that experience flat growth.

China Market Outlook

From the monthly report, The China Bulletin, some analysis from a recent issue includes the following items:
With a ban on timber harvesting in North China in place since the late 1990s, Russia has emerged as the dominant log supplier to China supplying up to 85% of the softwood log imports and feeding most of China’s growth in timber processing. After Russia, other suppliers of softwood logs represent a small part of China’s supply but their shares have been growing in 2009, especially those of New Zealand and Canada.

The Russian log export tax will remain until at least the end of 2010 at 25% (or a minimum of €15/m3) on softwood logs and a minimum of €100/m3 on hardwood logs. In fact, Russian log exports have had a surprising rebound in the first half of 2009 to remain close to their 2008 levels.

Although the volumes are much smaller, Russia also leads in China’s softwood lumber imports. In 2008, China imported 3.6 million m3 (2.4 billion bf – nominal) of softwood lumber with nearly 50%, or 1.8 million m3 (1.2 billion bf) coming from Russia. This was followed by Canada (closing in on Russia as the #1 lumber supplier), New Zealand, Chile, United States and others.

The opportunities for log and lumber exporters from Canada are expected to continue to feed China’s factories and concrete building boom, but not for building wood-frame houses – at least not yet!

The impact on China and other assessments are discussed in latest issue of the China Bulletin.