Mills question recovery strength

Long used to shipping their lumber at globally competitive prices, rather than having to go out and aggressively sell it, Canadian producers are wondering what else they can do in the currently flat markets persisting around the globe.

Most are left scratching their heads. Expectations for US demand recovery during 2014 started off the year modestly. At the halfway mark, those expectations continue to be revised downwards.

Similarly, demand from China is well below expectations. So too are dimension lumber prices. North American lumber price averages shot up by around 20% in 2013 but so far this year more than half that gain has been lost.

Even though lumber futures are up, investment fund managers led a second-quarter sharp sell-off of Canadian lumber shares - apparently disenchanted that the widely heralded 'lumber demand and price super-cycle' may have become a more distant prospect.

In the vital US market, residential construction activity continues to languish. One of the major problems is that mortgage lending - even when made to normally highly qualified buyers - just isn't happening. US banks and loan underwriters have gone from one ridiculous extreme to another. From being profligate in their lending, they are now scrimping and parsimonious.

First-time homebuyers continue to be sidelined. According to Mortgage Bankers Association data, they are only 30% of the market today compared with a normal 45%.

Unlike the UK's Help to Buy programme, which stimulates buying of new homes for all levels of buyers, the US administration is remaining 'hands-off' on any further stimulus for prospective homeowners.

Unsurprisingly, US housing market forecasts are being nudged downwards as the North American industry proceeds into the second half of the year. Forecasts anticipate that residential housing starts in the US will struggle to reach 1.1 million units in 2014 - but rise by 15% to 1.23 million in 2015, and to 1.35 million by 2016 (see graph).

Reflecting how expectations have become more cautious, just a few years ago analysts were projecting a much more robust recovery and US starts around 1.5 million by 2015.

The mid-term outlook is much better. Readers looking for a definitive assessment of the US housing market outlook should go to John Burns' website (www.realestateconsulting.com) and download his annual housing conference 'Summit 2014' publication.

New residential construction in Canada - always a fraction of the US total, and with wide regional variations - has remained reasonably solid. Around 185,000 residential starts are expected in 2014, declining modestly to 175,000 units by next year. Typically, there are few surprises in the Canadian domestic market.

A few years ago, Canadian sawmillers - especially those selling to the buoyant housing market in China - were able to brush off the worst aspects of the US market downturn because of strong buying by China.

Strategic repositioning of the vast Chinese economy by the new administration has taken longer than many observers expected. The medium and longer-term outlook for softwood lumber demand in China and East Asia is favourable for sawmillers. In the meantime, there has been an unexpected slowing of lumber imports (but not of softwood sawlogs).

Part of this recent slowdown is supply driven. A month-long non-union truckers' strike impacted the Port Metro Vancouver and reduced shipments in Q1 this year by around 15%. The strike backed up volume into mills' storage areas and was another headache for producers in an already softening lumber market.

European softwood lumber exporters, who have consistently pursued markets in China - not just as an alternative to slowing growth in their largest export markets in the MENA region - continue to enjoy success in value-added markets in China.

This reflects the evolution of the Chinese softwood lumber import market, as it continues to shift away from its earlier emphasis on lower grade lumber mainly for concrete forms (for example, western Canadian SPF#3) to higher grades - which are the focus of shippers from the EU, Chile and New Zealand.

Growth in these volumes is reflected in their rising shipments to China since 2007. Softwood lumber shipments from these countries to China last year totalled 2.1 million m³, or a 12% market share, which is expected to rise. Canadian shippers look at the data and acknowledge the evolution in Chinese lumber market consumption patterns.

With products with much higher moisture content, and North American dimension specifications which don't readily fit into remanufacturing markets in China, Canadian shippers would like to be able to produce for China the grades that Europe and others supply.

It's a wish they've toyed with for decades. Most Canadian sawmills are holding the line and persevering with their sales strategies. They believe that the current slack demand in North America and lower prices is just a reflection of the anaemic global economic recovery. It is how a dazed boxer might feel in the 13th round of a slugfest - except that the match keeps being extended.

Canadian sawmills, on average, are still operating at around 85% capacity, and finding it difficult to push higher. They need to produce above these levels to have any impact on lumber prices. The immediate prospects are frustrating but no-one is exiting the business just yet and the belief that things eventually will become substantially better still prevails.

In North America, and it seems globally too, the fundamentals of tightening supplies of timber are positive signs that today's out-of-sorts markets are not indicative of an impending malaise. The prevailing wisdom is quite the opposite.

There may be questions about the strength of the market recovery but there is strong underlying belief in the North American industry that much better times are just around the corner - led by US consumption and supported strongly by Chinese demand.

There is confidence that customers and investment fund managers will be back and buying in the not too distant future. In the meantime, Canadian lumber sales teams are on the road hard selling the story, and advising their mills not to scale back on dimension lumber production. Whether they are right is all a question of timing.