BC lumber prices are up, B.C. lumber company stocks are rising and the positive “China effect” on the province’s forest economy is still gathering steam.
Despite new threats of trade action by the United States against Canadian softwood lumber sales into U.S. markets, an air of cautious optimism is building within the province’s forest economy.
It’s too early to claim a complete lumber market turnaround – that’s quite a few years away yet. It’s being held back by severely constrained demand in the United States. Even so, the B.C. forest industry in 2010 already has outperformed most people’s expectations.
The big surprise is the magnitude of China’s rapidly growing demand for B.C. lumber (see “Hard work in softwood market set to pay off in China for B.C. producers” – Forest View, issue 1091; September 21-27). Buyers from China have been touring the world developing new sources of supply to replace Russian softwood logs and tropical hardwoods and to meet future growth needs. They have identified B.C. as a principal source and a competitive supplier of softwood lumber.
B.C. industry executives and the minister of forests have been in China numerous times hard-selling B.C.’s attributes as a reliable long-term supplier. They’ve also been promoting North American construction methods as a model for some of China’s housing needs. These efforts are paying dividends to B.C., not just in terms of volume demand, but also in helping raise North American lumber prices well above where they would be based on today’s low levels of U.S. new construction.
The volume impact of the “China effect” is easiest to see. For most of the past decade, in terms of production growth, B.C. sawmills have out-performed those in all other regions of North America. Recently, with the “China effect,” B.C. lumber output has been accelerating much faster than elsewhere (see chart). Exports to Asia are following the same trend.
Other lumber supply regions of North America are almost exclusively tied to U.S. and Canadian domestic demand. Geographically, B.C. is well placed to serve Asian markets, and several B.C. sawmills are changing their equipment, product specifications and grade-mix to a long-term focus on these offshore markets. That siphons lumber out of the North American supply chain, firming up the domestic supply-demand balance – and lumber prices.
The China effect has provided many other regions with a modest price benefit. The impact is most readily evident in B.C. Interior spruce-pine-fir (SPF) lumber – and increasingly in B.C. coastal lumber prices.
In key grades of western SPF, the demand “pull” is estimated to be anywhere between US$25 and US$35 per thousand board feet. That’s at least a 15% premium over where North American prices would be otherwise. The premium is expected to climb higher. No one expects demand for softwood lumber in the United States to recover any time soon to its former peak levels reached in the heady days of 2005. Especially not in the U.S. new-housing market, which is likely to remain chronically over-supplied after many years of excessive building. Demand has been slashed through a combination of falling home prices, rising foreclosure rates and limited job growth.
With new problems in the U.S. foreclosure process, analysts are now talking about U.S. new-housing starts for 2011 being barely above those for 2010 – at around 600,000 units. Many of those will be multifamily units, including condominiums and townhomes in urban areas – not single-family homes in the suburbs. That’s not good news for sawmills, because many of those types of housing use only 20% of the volume of lumber used per unit in single-family detached homes.
The huge backlog of foreclosed homes in the U.S., along with a significant inventory of new and nearly-new occupied homes for sale will mean that new construction will substantially underperform previous cycles for at least the next five years.
Home-improvement spending is likely to recover quickly and remain strong, as potential upgrading buyers stay put and choose instead to renovate their existing homes.
All of this is widely known. Even so, in the United States and parts of Canada, the managerial focus still is on immediate survival. As vital as it is, preoccupation with “survival-focus” tends to obscure underlying structural changes at work in the global lumber business. Importantly, many of these structural changes potentially are a net benefit to B.C.
Some of the most important changes are to do with the globally available timber supply. This has been tightening for some time. Pressures on land use have accelerated the process. Withdrawals of land from commercial timber to conservation and switching of land into food growing and biofuel production are not being offset by sufficient supplies of good-quality plantation sawlogs – at historical prices. This is forcing longer-term trend product prices higher.
The price deflating cyclical impacts of substantially reduced U.S. demand are only temporary.
For British Columbians, this structural shift makes Crown and private forests more valuable as a base for commercial tree growing. Higher market values imply rising standards of forest management. Forest-sector jobs are more secure, and shareholders can expect a better rate of return on their invested capital.
There is another area in which B.C.’s increasingly successful market diversification into Asia could also have a significant future impact: softwood lumber trade negotiations. The U.S. already is indicating that further softwood lumber trade actions against Canada are in the pipeline. The fact is, however, that the U.S. is no longer the vital market it was formerly.
A strong American market recovery would tilt the balance of shipments back in favour of the U.S. It would give the U.S. more bargaining power. But that’s not likely to occur until much closer to when the current trade agreement (SLA 2006) expires in 2013.
In the meantime, in addition to the traditionally important Japanese market, Canadian lumber trade negotiators will have one additional major market string to their bow – China. Today’s growing optimism within B.C. may be very cautious. But, eventually, it may stretch into a broad grin if the beneficial impacts of lumber trade with Asia, and the China effect, continue to evolve.
Peter Woodbridge (www.woodbridgeassociates.com) is president of Woodbridge Associates Inc. His column appears quarterly in Business in Vancouver.