Forestry Outlook 2016: Forecast is for stability

Falling demand in China for B.C. lumber is being offset by growing demand in the U.S. as low-cost mills, depressed Canadian dollar help exports
Canadian sawmills like Interfor’s Adams Lake mill are still operating, while some American mills curtail production in the face of soft lumber prices | Interfor 

Some time in the new year, the new federal Liberal government will begin consulting Canadians on the Trans-Pacific Partnership (TPP) – a 12-nation trade agreement that is supported by the B.C. forest industry.

It will also have to try to fill the vacuum that the expiration of the softwood lumber agreement has left – a vacuum that exposes Canadian lumber producers to potential anti-dumping duties in the U.S.

In the meantime, production and exports of B.C. lumber are expected to pick up slightly in 2016, despite a drop in demand for wood in China.

After the American housing market began crashing around 2009, China emerged as a life-saving new market for low-value lumber, used in construction. B.C. happened to have an abundance of it, thanks to a mountain pine beetle infestation that killed roughly half of the province’s harvestable timber.

But that surplus of pine beetle kill has largely been used up and China’s economic slowdown is now reducing demand.

Russ Taylor, president of International Wood Markets Group Inc., has been to China about 25 times in the last 15 years. He recently returned from there, where he said he has never seen such a poor outlook.

“It’s the first time I’ve come away and everybody we talked to was negative, not just for the three to six months period, but for all of next year,” he said. “It won’t be improving next year, is what we are hearing.”

Housing starts in China are down about 14%, Taylor said, which means B.C. will have to try to find other markets for its lower-grade wood.

“We are looking at continuing the work of diversifying our markets,” said Susan Yurkovich, CEO of the Council of Forest Industries. “TPP is helpful in that regard, and we’re looking at continuing to diversify into other markets – Asia, China, Korea, Japan, also a little bit of work [is] underway exploring the market in India.”

Fortunately, B.C.’s biggest market – the U.S. – is growing again, after nearly a decade of stagnation.

The U.S. housing market is expected to grow from one million new housing starts in 2015 to 1.1 million in 2016.

Most lumber-producing countries like Canada and Sweden are able to undercut American producers because their currencies are lower compared with the U.S. greenback. So despite a growing demand for lumber in the U.S., prices are lower than they might be.

Canadian mills are able to continuing running while some American mills have had to curtail production, Taylor said.

In the past, a strengthening U.S. housing market would mean a boom for Canadian sawmills. But Canadian mills in both B.C. and Quebec won’t be cashing in as they have in the past because they no longer have the volumes of harvestable timber they once had.

The annual allowable cuts in both B.C. and Quebec have shrunk, though for different reasons. A shrinking supply of timber is expected to result in an era of lower lumber production and higher prices.

“The U.S. housing market is still growing,” Taylor said. “In fact it’s going to be growing for the next five years. The question we keep asking is, ‘Where will the U.S. be getting its lumber?’ Because it’s not going to be from Canada.

“We’re forecasting lower exports to China and more exports to the U.S. market because of the fact we don’t have that low-value wood.”

It has been suggested that the expiration of the softwood lumber agreement should not be as big a threat to the Canadian forest industry as it has been in the past because Canadian producers no longer have the capacity to flood the U.S. market with cheap wood.

“We don’t have the supply,” Taylor said, “but I’m not sure the Americans believe us.”

With a relatively low Canadian dollar, Canadian mills will have an advantage when selling lumber to the U.S., and the fear is that that could prompt protectionist actions from the U.S.

Yurkovich said her industry hopes the new Liberal government will be able to negotiate an agreement with the U.S. to prevent that from happening.

“We are hopeful that we can find a new agreement with the U.S.,” she said, “but if we don’t, we would also prepare for the litigation that might follow.” 

Low dollar throwing B.C. sawmills an economic lifeline

A weaker Canadian dollar is keeping B.C. sawmills operating despite sluggish export markets and a slower than expected recovery of the U.S. housing market, according the International Wood Markets Group.

“With our low-cost mills we are in very good shape,” International Wood Markets president Russ Taylor said December 18.

“When the U.S. market collapsed in 2008, the China market came along and saved us. Now that China is no longer growing, we have the currency saving us. We keep dodging bullets.”

B.C. is one of the few global lumber producers expected to benefit from currency volatility. In its five-year forecast released December 18, Wood Markets described the rise of the U.S. dollar as a new “wild card” in global lumber markets.

Other lumber-producing countries have also had their currencies devalued relative to the U.S. dollar, giving them an advantage in export markets, but B.C. is the closest low-cost producer to the world’s largest lumber market: the United States. That is proving to be a lifesaver, Taylor said, even though the American market is recovering slower than most analysts forecast.

He said a structural shift away from single-family home ownership in the United States – a hangover from the 2008 housing collapse – has led to an increasing number of families favouring rentals and condominiums over single-family homes. Despite the shift, Taylor said U.S. lumber consumption is still growing at a healthy 4.5% a year.

However, nobody still talks about the “super cycle” many analysts forecast, where tightening demand, a recovering U.S. market and strong export markets would push lumber prices into the stratosphere.

In its five-year forecast, Wood Markets downgraded its outlook for the global solid wood sector to one of lacklustre demand and pricing until 2018. Until then, what Wood Markets describes as a global malaise in demand coupled with rising production are expected to stall any price movement in the U.S. market.

The issue of a supply shortage still exists, but now Canada’s total lumber output is not expected to flatten until 2018, just as U.S. and global demand are expected to gain momentum.

“After that, it starts looking very good,” Wood Markets reported.

Taylor said he still expects lumber prices to reach near-record levels by 2019. The highest lumber prices were in the years 1996 and 2004, when they averaged US$400 a thousand board feet for the entire year.

Prices for western spruce, pine and fir, the commodity product made in B.C., are currently hovering at US$269 a thousand board feet, down from US$339 a year ago. The low prices have hurt American sawmills, which are now among the world’s highest-cost producers.

Meanwhile, because lumber is priced in U.S. dollars, Taylor said the depreciation of the Canadian dollar has shifted the advantage to producers north of the border.

In export markets, particularly China, shipments have not collapsed; they are just no longer growing.

Taylor added that other producers, from Russia to New Zealand, are using their own currency advantages to increase their own market share, affecting B.C. producers.

“The U.S. market will always be our best market once it recovers. It’s the closest market to us, and they buy our sizes of lumber. Throw in our currency advantage and we are off to the races.”

– Gordon Hamilton

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