New five-year outlook shows that supply and demand conditions in wood products for the long-awaited ‘super-cycle’ are now taking hold, with the full impact still some 3+ years away
With the return of a demand-driven wood products market in 2012 – due to rapidly increasing housing starts in the U.S. – it is now forecast that lumber and panel prices will move to new highs in 2013 and record highs for lumber in 2014. A North American “super-cycle” has been predicted by Wood Markets since 2008 as a result of emerging supply-side constraints (mainly on forests and logs) as well as changing demand dynamics, but the global financial crisis that started in late 2008 and an unusually slow U.S. housing market recovery have delayed this event until 2012.
With the expectation of strong growth in U.S. housing starts over the next five years, combined with a better balance in the housing inventory and a recovering economy, the U.S. supply chain is expected to become overwhelmed at times during the next five years, allowing wood products prices to soar.
While there are a number of assumptions that are required to maintain steady economic growth, a strong wood products recovery amidst a tightening timber and mill supply base is still expected.
These and other findings on U.S. and Canadian lumber markets as well as forecasts for all engineered panels were released in December by Wood Markets in its eighth edition report, "WOOD Markets 2013 • The Solid Wood Products Outlook • 2013 to 2017."
The report examines an overall tightening of the global timber supply base, but forecasts that it is mainly in North America where scarcities will be felt. With China now importing more and more logs and lumber from North America and with U.S. demand now rebounding, some key structural constraints are expected to keep log and lumber supplies tight relative to demand growth, including a collapse of the Russian logging sector in 2009 from the global financial crisis where log exports are now less than 40% of their 2007 level as they continue to decline in 2012. Changes to the Russian log export tax will continue to leave Russian log exports less available and expensive.
After a “cooling-off” period in 2012, China’s requirement to feed its growing wood deficit will see a return to steady demand growth for imported logs and lumber from North America and other sources.
The mountain pine beetle epidemic in the B.C. Interior will, by the end of the decade, kill about 60% of all the pine trees in the BC Interior. This will permanently reduce Western SPF lumber production starting in about 2014 or 2015. The Quebec government (which controls 90% of the forests in the province) will have reduced the timber harvest by at least 30% between 2004 and 2013, permanently reducing lumber production.
Consequently, Canada’s lumber production will plateau by about 2015, allowing for essentially no increases in exports to the U.S. and will, therefore, see its U.S. lumber import market share plummet to two-thirds of its historical level. By the end of the decade, B.C. and Quebec lumber shipments will collectively be lower by some 10 billion bf as compared to peak shipments in 2004.
The role of Timber Investment Management Organizations (TIMOs) will play out as log markets strengthen. As many large U.S. corporate forest companies with sawmills have sold their private timberlands to TIMOs, timber prices are eventually forecast to rise and be sold more on the margin, tightening the economics of sawmilling in the U.S. and potentially limiting incremental lumber production.
Where will the U.S. and China get lumber after mid-decade?
“Both countries will need to import increasing volumes of lumber and logs that will be tied more and more to international market forces as global timber and lumber supplies tighten,” explains Russell Taylor, president of Wood Markets. “U.S. housing starts are expected to rebound from 550,000 units in 2009 to the long-term sustainable level of 1.5-1.6 million starts by 2017 and Chinese housing and wood demand is expected to grow further after the new government’s economic policies are unveiled in Q2/2013. The net result is that log and lumber demand in these countries are expected to grow steadily and drive global supply and prices.”
The outcome will be rising and even record-high U.S. lumber prices. In fact, Wood Markets 2013 is forecasting that export duties on Canadian lumber to the U.S. will essentially be at a ‘zero-rate’ for all five years of the forecast as compared to maximum duties of 5% or 15% (depending on the Canadian province) for most of the last five years.
“Increasing prices will see the return of European lumber to the U.S. market – and lots of it – to fill the widening gap as Canadian lumber production and exports slow,” said Gerry Van Leeuwen, vice-president, “and, as a matter of fact, some European supplies are already starting to arrive a current prices, which are already at six-year highs.”
Nevertheless, as European log costs are more than double those of North American logs, much higher lumber prices are required to attract significant volumes from Europe. So, higher prices are inevitable as the supply chain struggles to secure and move rising volumes.
Five-year forecasts on OSB and plywood also see strong prices, but not as high as what are in store for lumber. By comparison, the particle board and MDF sector will see more limited growth, but higher demand and prices are also forecasted.
However, the entire super-cycle thesis requires strong and growing demand in the U.S. market as well as stable to increasing demand in other global markets (no global economic recession), especially in Asia. Without these conditions and the other key ingredient, increasing lumber demand, it is possible that the super-cycle could stall early or the timing may be pushed out further. In any event, the prospects of a
tightening of the global timber and lumber supply are a reality and are expected to play out over the next five years.