The response of Canadian lumber stocks to the U.S. Department of Commerce’s April 24 announcement of preliminary countervailing duties on imports of Canadian lumber was a relief rally. Overnight, prices rose sharply.
Two weeks later, some of those gains have reversed – reflecting a combination of volatile lumber prices and growing political worries.
On the duty issue, investors can be forgiven for thinking they escaped a bullet; they did. But a shrugged-shoulders conclusion from the Canadian side that “we’ve been here before, and it wasn’t all that bad” would be highly inappropriate.
The Americans still have a trump card, possibly several – including periodically adjustable import quotas. A final determination by the U.S. on alleged Canadian subsidies has yet to be delivered, and anti-dumping deliberations (duties to be announced in late June) may yet yield surprises.
Lumber is not currently part of the North American Free Trade Agreement (NAFTA). But, without the protection it has received historically from bi-national NAFTA panel reviews, who knows what fate awaits it?
It’s important to remember too that final determinations do not signal an end to the softwood lumber issue; they’re just another step along the road of managed trade. The U.S. and Canada have been without an agreement on lumber for a year and a half. Interests are divided: Canada badly wants a long-term deal; the Americans see their hand strengthening – and are in no hurry to settle.
Not just that, but the Canadian industry’s east-west “divide” has a history of discord. It threatens a northern accord that might be the basis of an early agreement on managed trade in lumber - before it is pushed aside by a possible NAFTA termination decision by the U.S. At minimum, tough renegotiations.
Some industry insiders are unperturbed. They argue that Western Canada holds a strong hand. It has the ability to increase lumber prices to fully offset U.S. duties, they say. In addition, it has the “China card.”
Since mid-January 2017, SPF (spruce, pine, fir) lumber prices have risen rapidly – anticipating stiff duties. Lumber futures continued to advance after Canadian producers, led by West Fraser, recently announced sizable “leg-up” price hikes across the board. Offer prices for bellwether items increased by more than 30% and were accepted by the market.
The U.S. market has been a battlefield since then, with sellers and buyers sometimes stepping away from the market – wondering if so-called lumber supercycle fundamentals are at last shifting in favour of lumber manufacturers and wholesalers. But remember that it’s still a weather-delayed spring buying season, when homebuilders in the U.S. have to pay the going price.
For Canada, the “China card” (including other Asian markets) is powerful. But it’s not powerful enough to conclude that Canadian sawmillers, faced with high and unresponsive Crown-timber log costs and tight supply, have achieved sustainable pricing power in lumber sales to the U.S.
Lumber and log buyers in Asia need, and want, alternatives to burgeoning imports from Russia. If the U.S. won’t pay today’s tariff-added-in inflated prices, proponents argue, Chinese and Japanese buyers will eagerly pay tariff-out prices for Canadian lumber.
Well, none of this suggests a déjà vu scenario of calm serenity, or anything that is sustainable.
Most U.S. lumber buyers have supported the Canadian position in previous negotiations of softwood lumber agreements. Of course, that’s not political; it’s financial. Tariff-free or lower-priced supplies from Canada significantly help their cost-competitiveness in building new homes and in the renovation market.
Problem is, if pain is inflicted through sustained high lumber prices, Canada’s U.S. customers will quickly forget who caused it. The blame game will start and, under the current U.S. administration, the tweeting finger inevitably will point at Canada.
The risk is that if today’s relatively high lumber prices continue, blame will be attached. Canada’s recently attained influential supply position in the U.S. lumber manufacturing sector, notably in the U.S.South, might become a political issue. That’s not a space Canada wants to occupy.
Moreover, within International Paper, Weyerhaeuser and other U.S. land-owning lumber producers, as well as a large number of influential private timberland owners, there’s a strong and determined counterculture that does not favour unrestricted imports from Canada.
In a recent press release, the U.S. Lumber Coalition (www.uslumbercoalition.org) said that trade action by the U.S. was “supported by producers accounting for nearly 70% of all softwood lumber produced in the United States (excluding companies that are related to Canadian producers).” Hmm!
Timberland owners are incensed that the benefits of today’s high lumber prices are not being passed through to them in terms of higher log prices. Experts predict a continuation of low log prices in the U.S.
A win-win for the coalition would be to succeed in the blame game against Canadian suppliers and impose import quotas on Canadian lumber shippers.
Now that’s managed trade – U.S.-style.
Canada has some very smart industry and trade negotiators burning the midnight oil in Ottawa and Washington, D.C. Their backs are to the wall. For sure, they won’t be able to offer a timely proposal to the U.S. side if a Canadian “divide” tolerates regional over national interests.
In the meantime, investors in lumber stocks should be belted in for a roller-coaster ride.
One thing is for sure: Canada’s softwood lumber manufacturers are a long way yet from being out of the woods. They should be particularly vigilant. Wily creatures abound, absolutely determined to ensure they won’t emerge from the woods unscathed.
Peter Woodbridge is president of global forest products research and consulting firm Woodbridge Associates Inc. (www.woodbridgeassociates.com).