US Lumber Outlook Looks Positive

After the currency-driven global lumber price slump in 2015, market demand and prices both started to improve in 2016. While overall global demand improved modestly in 2017—at only half the rate of 2016—there have been supply disruptions and changing dynamics that created a wild and unpredictable market that surpassed everyone’s expectations. 


According to Wood Markets, all markets appeared to be at least good to strong in 2017; this included the U.S., Canada, most of Europe, Japan, China and much of Asia. Only one market region remained unsettled again: the Middle East/North Africa (MENA)—Egypt and Algeria, specifically, along with some areas of the Middle East. 


The US was a solid growth market again in 2017 (the case since 2010), but supply dislocations (forest fires, hurricanes, etc.) and other developments resulted in surging prices throughout the year. 


As usual, there are always various change factors at work that can directly or indirectly lead to unpredictable swings in lumber supply, demand and prices, and this was especially the case in 2017. 


One of the largest market variables in 2017 was the initiation of import duties on Canadian lumber shipments to the US (announced in late April and including retroactive duties back to late January 2017). These duties were expected to cause huge disruptions and volatility, and certainly did so as Canadian exporters successfully pushed up US market prices to cover all of the import duties.


Both the US economy and housing starts continue to improve. The official unemployment rate is now down to almost four percent while home foreclosures are much closer to historical rates than ever. 


New residential housing remains on a slow but steady upward trajectory and should reach between 1.20-1.22 million units in 2017.


Stocks of both new and existing homes have retreated to historical levels, but prices for new homes continue to move up in many markets.


With a shortage of building lots and workers, as well as strong credit ratings required for new-home purchases, a number of factors have contributed to a tight housing inventory, fostering price increases. 


The five-year housing forecast is still very conservative, and the publication do not foresee US housing starts reaching 1.5 million units until 2022 at the earliest. 


Even with a slow rate of growth in US housing starts in 2017 and given what is expected from 2018 to 2022, supply-side impacts have already led to some major imbalances; overall demand and market activity is anticipated to remain active and volatile again in 2018 and beyond.


For the supply of North American wood, its production continued to expand in 2017 as a result of slowly growing demand in US housing and all other end-use segments. Higher prices in the US market limited exports for both US and Canadian companies, and this led to the fourth consecutive year of declining net trade.


Canadian lumber production, which has continued to rise from its bottom in 2009, should reach 28.2 billion board-foot in 2017; however, this will represent a decline of about 300 million board-foot from 2016, well below the 2004 peak of 35.2 billion board-foot. Lumber output from the BC Interior was flat between 2011 and 2014 and then peaked in 2016 at 12.1 billion board-foot. 


With the implementation of U.S. import duties starting in late January of 2017, lumber prices were raised to cover the duties and stayed high, exacerbated by severe forest fires that crippled logging and sawmilling operations over a two-month period. 


Interior BC lumber output is likely to decrease somewhat in 2018, but this will depend on the declines in log supply (including the economic viability of processing dead pine timber) and lumber prices. It is still expected that as many as three to five sawmills will close in the BC Interior by 2025, but the timing is unknown. 


Lumber exports to Asia may grow, but volume gains are expected to be small if they occur at all given softer market demand in Japan in 2018 and lower prices in China (versus the US). 


US demand will be leaning more heavily on expansions in US production and European lumber imports in the 2018-19 period. Production increases in the US will be subject to many factors, including lumber prices, log supply and costs, financing, supply chain dynamics (including loggers and sawmill workers), etc. This means we could see varying supply responses in different regions of the US, and at different times.



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