Summary
¦ The outlook for US housebuilding is poor through to 2014.
¦ European exports to the US tend to feed the reburbishment market.
¦ Increasing demand from China could lead to a shortage of SPF in the US.
¦ Growth in North America’s log supply is slowing and prices will rise as a result.
¦ Demand from China is also impacting prices.
Fundamental structural shifts in the North American timber industry could have far-reaching effects around the world.
These changes have been pushed into the background by the recent global and US economic downturn, but projecting these various events forward to the year 2014 and beyond leads to some important implications for the global competitive positioning of the world’s various lumber supply regions.
They are likely to affect not just North American regional producers, but could also have impacts on European shippers to the US eastern seaboard and gulf states. They could influence future South American supply into the US. They might also tilt the balance of lumber trade in the eastern Asia/eastern Russia region – notably supply to Japan, and to the rapidly growing lumber market in China.
Importantly, as a potential sales opportunity for some European spruce-pine producers, a deficit is looming in higher grade North American lumber supply. This will be especially acute in the key sector expected to lead the US demand recovery – residential repair and remodelling (R&R).
Few people would expect softwood lumber consumption in the US to recover strongly anytime soon. Longer term, by around 2016, demographics and other fundamentals will drive US annual consumption beyond previous peak levels of 64 billion board feet (BBF) – or around 150 million m³.
Typically, about 80% of softwood lumber produced in North America directly or indirectly finds its way into new or existing housing. Lumber is highly price-competitive against concrete, steel, stone and composites – and dominates total materials consumption for residential framing and several related appearance purposes. In other applications, however, it loses out on structural performance to other wood materials (such as engineered wood) and to non-wood materials.
Housing market
The collapse of the US housing market dealt a severe blow to the North American sawmilling industry. Although longer-term fundamentals for new home construction are very good, the outlook to 2014 is abysmal compared with previous recovery cycles.
With extensive foreclosures of existing homes in the pipeline, and numerous other distressed home volumes pending (in total estimated at over 4.7 million units), excess supply over current demand represents a substantial overhang of housing units for several years to come. Simply put, on a national basis, the US does not need any new residential construction for several years.
That’s the national picture but, just as in Europe, markets in the US are regional and highly segmented. Around 70% of the currently vacant homes in the US are concentrated in 11 states, including California, Florida, Nevada and Arizona. Thus, new units are being constructed to meet regional and price-point needs. Housing starts are predicted to recover to around 1.35 million units by 2014. This is in the middle to lower end of the range of many North American market forecasters.
The expected level of housing starts has several facets. US homebuilders are responding to consumption changes by building smaller homes. The single family detached percentage of the mix is declining sharply and more multi-family housing units, such as flats and town homes, will be built. Numerous households, burned by recent economic events, will switch from ownership housing to rental. That means much lower than historical levels of lumber consumption in the new construction market.
European target
Fortunately for most European shippers to the US, new housing is not the sector to which they target most of their softwood lumber sales. Instead, Europe’s zero-wane, generally high quality structural and appearance lumber is focused on meeting incremental demand in the fast-growing residential R&R market. As illustrated in the graph, the R&R market will far outperform the new housing market in the US over the next five years.
Regionally within the US, the housing market meltdown has debilitated the over-built US west market, for example in Las Vegas, Phoenix and southern California, and the slower growing midwest market. The US south, where about 60% of housing-related activity occurs, is expected to lead the sector’s recovery. That’s good news for European shippers focused on big box retail markets on the eastern seaboard and gulf states.
Ironically, the new and unexpected demand growth in China is providing a windfall for western North American sawmills. This is one of the supply and global trade shifts taking place which could become permanent. If so, it would divert a substantial volume of softwood logs and lumber out of the North American (formerly regional) supply pipeline into offshore markets.
For British Columbia, which in the past has supplied enough spruce-pine-fir (SPF) lumber to build one in every five homes constructed in the US, this implies a significant repositioning to alternative markets. Having been hammered for years by punitive US trade actions against imports of Canadian softwood lumber, the potential of ongoing rapid market growth in China and other parts of Asia has many western Canadian sawmills cautiously excited.
It’s not just a market diversification story for western Canada’s SPF industry. It is well known that much of the western industry’s supply of lodgepole pine is dead or dying from a massive pine beetle infestation. A less well-known fact is that western SPF lumber supply will start to decline very sharply. Ironically, this will occur just as the US market recovery gathers momentum around 2012.
The pine volume within the SPF grouping will diminish. Moreover, because the average log quality is declining, much higher yields of lower grade lumber are already being produced.
Quality standards
Rigid quality standards mean customers will receive the same quality in each grade as before. Higher quality lumber grades volumes, however, will decline. These include North American grades such as No. 2 & Better, J-Grade, Zero-Wane and machine stress-rated lumber. Lesser volumes of these grades will be available from western SPF sources.
This massive and unprecedented supply shift suggests that three events will occur.
Firstly, with a large volume of lower grade SPF lumber already being sold to the Chinese market, a relative shortage of this material will occur in US markets. Depending on prices, less supply could be available for Canada’s modest but growing SPF markets in North Africa and the Middle East.
Secondly, the China market today is at an embryonic stage. Many industries and sectors are learning to use softwood lumber for the first time. The demand for higher grades is rising – including a very modest level of demand in wood housing.
That’s great news in a country which reportedly builds 7 million-plus new housing units per year. Direct comparisons of housing types and quality between China and western countries can be very misleading. Think of China’s potential, however, as the equivalent of 50 times the annual housing starts in the UK.
China’s demand for western-sourced lumber (partially replacing logs restricted in supply from Russia) will reduce the supply normally available to North American markets. Ultimately, eastern Russian supply could have a competitive edge in markets in China and Japan, but at present, the necessary capacity and infrastructure are not in place. In the meantime, log volumes from the US west and lumber volumes from western Canada to China (see above) are growing very quickly.
Thirdly, alongside generally tighter supplies of economically accessible higher quality sawlogs worldwide, North American incremental sawlog supply is still growing – but at a slower rate. So even though North American demand in this recovery cycle will be constrained, it is likely that softwood lumber prices will rise rapidly during the recovery cycle.
Unprecedented price levels
Evidence of this is already apparent. Random Lengths notes that western SPF lumber prices are already reaching unprecedented high levels for this point in the recovery cycle. These high prices are not commensurate with today’s very low level of new housing activity in the US. Analysts are attributing part of this price boost to the “China effect”.
Whether integrated or non-integrated, softwood lumber producers globally are destined to benefit in some measure from the globalisation of the industry and from growth in new markets such as China. Supply ultimately will rise to meet demand. New sources and alternative materials will become available as market price points move higher. What’s different in the current and future cycles is that, in order to obtain the supply of solid sawn lumber needed, regional and world market prices are likely to be much higher than they were historically.
? Peter Woodbridge is president of Woodbridge Associates Inc, a Vancouver-based consultancy (www.woodbridgeassociates.com).
