Forestry's Green Warrior
INDUSTRY MARKET OUTLOOK 1996-'97
Summary: 'Cautious optimism' is the bottom line as industry analysts look ahead to markets for North American wood products over the next two years.
By Reg Barclay
Where is the industry going in the next two years? To the quick, based on what came out of a recent Charles Widman & Associates-sponsored conference in Vancouver, the picture looks like this: growth in lumber will be modest, balanced by a similarly modest growth in lumber supply, as declines in some regions are offset by increases in others.
Structural panel production will continue to be dynamic with an apparent oversupply resulting from an increase of 9 billion square feet in OSB capacity over the next two years.
The wood products market is changing rapidly, as traditional products are substituted with new products, both wood and non-wood. This means that manufacturers must focus less on supply and more on customer needs to be successful.
All of these points and more were made by eight industry analysts, speaking to a conference of 270 North American lumber executives late last year. Residential construction in the US, a key component of wood products demand, will be stronger in 1996 and 1997. Housing starts are expected to reach 1.37 to 1.4 million levels, slightly higher than estimates for this year of 1.35 million units.
While improved, starts are well below the 1994 peak of 1.45 million, which to be fair, is a high for the past decade. Canada's housing starts will also be slightly better, but will remain at recent depressed levels, well below the peak of 1994. GNP growth will remain modest and unemployment high as the high public debt and constitution difficulties create uncertainty.
The spectre of higher interest rates is expected to be avoided as inflation remains at low levels. This will benefit residential construction, which is highly interest sensitive, and the economy, which is expected to grow at about three per cent per year. Interest rates will remain low, at least for the first half of 1996, and will strengthen moderately in the second half. However, the Federal Reserve will monitor the US economy closely, and if inflation heats up, higher rates are a certainty.
Single home construction in 1996 will remain high at 1995 levels, at about 1.07 million, or 80 per cent of total starts. Multi-family construction will continue at the depressed levels of recent years. The high level of single home construction and an increasing size of homes built will benefit wood product consumption. Also, commercial, non residential and repair and remodelling construction all look stronger for 1996.
In presenting the outlook for 1996, Patricia Mohr, economist for the Scotia Bank, and Michael Carliner, economist for the US National Association of Homebuilders, were in fair agreement. Mohr speculated that the Canadian dollar would consolidate between 73 and 75 cents US; the US dollar would strengthen modestly against the deutchmark and sterling. Carliner noted that the US government objective for a "soft landing" for this expansion cycle has thus far been successful; however, the risk of recession is still high. As history shows, prior soft landing efforts have seldom worked, and normally a recession occurs every four years into a business expansion cycle. He added, "Nevertheless, if soft landing efforts are successful, we are heading into a period of 'sustainable growth', without the setback of a recession."
Mohr said that mills will continue to be profitable over the next two years, although margins will be lower. Earnings will be supported by high pulp chip prices, in turn supported by high pulp and paper and newsprint prices, which will remain at current levels.
Lumber dominance in Canadian lumber supply is shifting from BC towards eastern Canada. By 1996, production in the east is expected to exceed 10 billion fbm. This is an increase of four billion fbm over five years, said Russ Taylor, a Vancouver consultant. The US south region is expected to produce 15.2 billion fbm in 1996, up slightly over this year. That level will make the south the largest lumber-producing region in North America. Production in the west coast of Canada and the US will decline, as government regulations restrict log supply.
Lumber consumption in North America will increase modestly in 1996 over 1995 and will be close to the 1994 decade peak level of 55 billion fbm. While overall supply and demand is in balance, shortage of higher grades, longer lengths and wider widths will result in substitution and increased lumber imports.
The wide price swings in 1993 and 1994 resulted from market uncertainty about supply. For 1996, Taylor estimates that price volatility will be less, but similar to this year, with prices for Western SPF R/L KD 2x4 Std and Btr, in US dollars, varying between $200 to $300 per Mfbm, a range of a three-year low to a two-year high.
Overseas lumber exports from Canada and the US will continue a five-year decline. More of Canada's surplus of production is going to the US, as overseas markets have been soft and the US has offered better mill returns. Canadian share of US consumption is up from 29 per cent in 1991 to 34.8 per cent in 1995, with 1996 projected about the same. US overseas exports will be down, reflecting lower overall production levels as curtailment in the western regions slightly exceeds the increase in the south.
Canada accounts for 97.5 per cent of lumber imports by the US; however, imports from Chile, New Zealand, Brazil and Mexico are growing rapidly, basically in industrial grades. Taylor asks, "will 1996 see the first serious shipments of structural lumber from Scandinavia or Eastern Europe?" Total structural panel demand in North America will increase three per cent or about 1.2 billion sf 3/8 over 1995 levels. This reflects a modestly stronger residential construction sector and stronger remodelling, industrial and non-residential end use sectors. Craig Adair of the American Plywood Association called 1996 a "Goldilocks recovery - not too hot and not too cold."
OSB capacity is booming and plywood capacity is declining. Nine billion sf of new OSB capacity is forecast to come on stream in 1996 and 1997, an increase of 32 per cent, while plywood production will decline 14 per cent.
It's simply a case of economics. OSB is cheaper to produce and highly profitable - so far. There are 11 new OSB plants under construction in Canada and 11 in the US, all due to start up over the next two years. The bulk of the Canadian production is exported to the US, although some new capacity in western Canada is headed for Asia Pacific markets.
Adair added that by the year 2000, OSB will have grown from 12 to 18 billion while plywood will decline from 20 to 16 billion sf 3/8. So far, OSB has kept prices at very profitable levels, but that may change over the next two years. "Plywood exports, mainly from the US southeast, will continue to increase in 1996. The main market is Europe, but about 40 per cent of exports go to Mexico, Japan and other Asia-Pacific countries," says Adair.
In a presentation entitled Facing the OSB Wave, Peter Lang from Evans Products outlined some strategies for Canadian plywood to maintain production levels, steady at two billion sf 3/8, for the last 10 years. Canadian plywood is centred in Canada's west. With a long export history and good market promotion, Canadian plywood has an excellent reputation in overseas markets. Currently, 82 per cent of production is consumed in Canada, nine per cent in Europe, seven per cent in Japan, and two per cent in other markets. The new Canadian Plywood Association is gearing up to promote more specialized products to meet customer needs, utilizing the advantages of plywood's reputation for strength and durability. Plans call for an increase in exports to 50 per cent of shipments, continuing the three year trend where exports have increased from 18 to 30 per cent.
The future for engineered wood products looks bright for the next few years. However, while volumes have increased rapidly, the percentage increase in growth has been declining, said Steve Killgore of Willamette Industries. "The recent volatile price years made the market very receptive to engineered wood products. Lumber prices are lower now and more stable. It will be a challenge to maintain the momentum in sales growth.
Manufacturers will have to focus on quality and customer education. An industry-wide standard may be a good marketing tool."
The value-added sector in BC has grown steadily since 1985, but growth is slowing, reported Brian Hawrysh of BC Wood Specialities Association. He added, "while sales volumes have doubled in 10 years, business has become more competitive. In some categories, there is oversupply. Future opportunities will depend on better customer service, improved packaging according to customer needs and maintaining a high standard of quality."
Three other speakers provided good advice for the balance of the decade. Graham Dallimore, Global Futures Corporation, outlined the procedures and benefits to both buyers and sellers of using the futures market to hedge against price variability. David Still, Weyerhaeuser, and Steve Davis, Louisiana-Pacific, spoke about the changing nature of the market, as new wood and non-wood products substitute traditional products, causing uncertainty at the user level. Also, increased competition is resulting in slimmer margins.
The customer will be king for the balance of this decade, and manufacturers must focus on customers' needs. This underlines the importance of excellent product distribution systems in servicing individual customers.
This page and all contents
©1996-2007 Logging and Sawmilling
Journal (L&S J) and TimberWest Journal.