Tough lumber and OSB markets are expected this year, but the expiry of the Softwood Lumber Agreement with the US represents the wild card in the market scenario.
By Russell E Taylor
The erosion of lumber prices to 10 year lows in early 2001 has started to cause panic among lumber producers. OSB producers are facing a similar scenario as prices plunged at the start of 2001 to five year lows. While a diagnosis of the problem is very simple-too much supply chasing a slowing demand-a prescription is much more complicated and it's likely to take most of this year to create some solutions. As a result, the outlook for lumber and panel products calls for continuing weak prices in the short term until further and substantial supply curtailments occur in both lumber and structural panels to allow prices to move higher.
Softwood Lumber Outlook
When North American softwood lumber prices starting plunging in the second quarter of 2000, few realized how low they would go or how long this situation would last. Looking out to 2001, all the evidence now points to a continuation of an oversupplied market combined with slowing demand, although at still very high levels. In the lumber supply and demand forecast, the assumption is made that the five-year experiment with the Softwood Lumber Agreement (SLA) will end and it will not be renewed after March 31, 2001. It's expected that the Canadian side will negotiate for free trade with the US, causing the Americans to then institute, or at least threaten to impose, a countervailing duty action in April.
If this is indeed the outcome-and it could very well change through new negotiations or political posturing at anytime in the first quarter of 2001 right up until the eleventh hour-Canadian lumber could then start to be allowed to enter the US without the need for quotas. This is at least until the Americans rule if Canadian lumber is "subsidized" or has caused injury to American producers and they do not impose retroactive duties on lumber from April 1 (another wrinkle that could confuse markets in April). Consequently, more uncertainty is looming for lumber producers and buyers as the end of the SLA looms.
This countervail action has many variations, but the initial evaluation on injury to American producers is likely to be finished by August, 2001. After that, bonds at the preliminary duty rate would be required on all Canadian shipments to the US assuming that the initial ruling goes against Canadian producers. This window of time (April to July or August) could offer Canadian shippers the opportunity to ship unlimited volumes to the US, including the temptation to transport unsold lumber across the border before potential bonds are required.
The final decision regarding whether a countervailing duty is to be assessed on Canadian exports to the US- as well as the amount of the duty: estimates range from zero to 20 per cent-could be delivered as late as December 2001, yielding a most uncertain and volatile market for all of the year. The forecast expects weak prices to limit the rumoured "flood" of Canadian lumber into the US. Although stockpiling practices on the US side may occur, it will be to a limited extent. If the SLA is not renewed, discipline will be required by Canadian shippers to maintain a balance of supply relative to demand or else prices could remain near the dreadful lows already achieved in 2001. This is extremely critical since the major Canadian producing regions all had some excess capacity in 2000 that has been underutilized because of quota restrictions imposed by the SLA.
Supply vs. Demand Imbalance
From the experience of 2000, what we now know is that supply side dynamics- including improved yields and faster throughput from technology, expanded processing of smaller logs, reduced log and lumber exports and increasing volumes of lumber imports-have all contributed to soaring capacity levels and overproduction at an astonishing rate. The outlook for 2001 will be further influenced by the culmination of excess supply, slowing consumption and the expected termination of the SLA, while the prospects for 2002 should eventually result in some improvements. When the final numbers are in, North American lumber production will have dropped in 2000 by about two billion board billion board feet to 63.6 billion board feet- with Canadian mills accounting for 1.2 billion board feet of this drop.
For 2001, lumber output is forecast to move lower by another one billion board feet to 62.6 billion board feet, and US mills will take the brunt of this drop (a 750 million board feet reduction). Both producing regions are expected to be stable in 2002 when production levels are forecast to improve by 150 million board feet to 62.7 billion board feet. Canadian lumber exports to the US peaked at 18.24 billion board feet in 1999 and are expected to decline through 2001 to 17.8 billion board feet in response to lower demand. Uncertainties related to the expiry of the SLA will compound the outcome of what the final export volumes will be and from what Canadian producing regions they will come.
Weak Prices the Result
There is little good news to influence lumber prices in 2001. If excess lumber production can be managed through planned curtailments and/or closures of uneconomical capacity-as finally started happening in the fourth quarter of 2000-then the second half of 2001 might be salvaged. However, the prospects of a bloodbath for the first six to seven months of 2001-tied to the expected expiry of the SLA-remain very high. Consequently, prices for the benchmark WSPF 2x4 random length lumber are expected to average US$225 per thousand board feet for 2001 (including the likelihood of a countervailing duty built into this price) as compared to US$259 per thousand board feet for 2000. The bottom line: a very poor year for softwood lumber producers is expected in 2001.
OSB & Plywood Outlook
OSB The next OSB wave has just started and already the reality of too much capacity relative to demand has taken place. This trend is expected to impact plywood even further over the next four years as more OSB plants start up. Aside from economic drivers, the major factor that will influence structural panel prices will be the rate of construction of new OSB plants in North America (and, to a lesser degree, offshore plants). In 2000, four new plants were installed and two expansions occurred, representing an additional capacity of over 2.5 billion square feet.
For the period 2001 to 2004, another four billion square feet of new capacity is planned at 10 sites in North America-over and above the 500 million square feet per year of "capacitycreep" at existing plants. Of the additional 10 plants proposed, half of them are in formal stages of planning, indicating that at least nine new plants and two capacity additions will likely be built over the entire period between 2000 to 2004. Looking ahead, over the next three to five years the demand for OSB is heavily tied to housing starts and these are not expected to reach the levels of 1999 or 2000 (over 1.6 million US starts) until 2004 at the very earliest. As a result, structural panel demand is expected to slip from the 39 billion square feet level achieved in both 1999 and 2000 before rebounding as early as 2003 to finally exceed 40 billion square feet.
The next four-year period (between 2001 and 2004) looks extremely questionable for OSB. Too much planned capacity is chasing a demand scenario that is expected to show little growth. Our forecast assumes fewer OSB mills will be built than currently planned and operating rates should hover between 85 per cent and 90 per cent between 2001 and 2005-well below those levels achieved in the 1997 to 2000 period.
Plywood Trends and Outlook
The plywood outlook is based on declining production due to reduced demand and, more importantly, substitution from OSB. Sheathing plywood will be under price pressure from lower cost OSB resulting in substantial declines in output and plywood mill closures. These reductions will be heaviest in the US South, as output is forecast to decline by almost two billion square feet from 2000 to 2005. Canadian plywood is expected to be under less pressure by comparison. The supply and demand outlook for structural panels points to soft prices due to slower consumption and the prospects of excess production in the next two years.
Improving prices are not expected to occur until 2003 when the supply and demand balance starts to improve and North American consumption levels rise again. As a result of these two main factors, our price forecast calls for OSB (using US North Central as the base product) to average around US$150 per thousand square feet for the next two years-well below 1999's average of US$260 per thousand square feet. Unlike the last six years, the next four years will need some careful strategic thinking to avoid an all out bloodbath in OSB.
The premise of lower prices and more aggressive competition both inside and outside North America will still create a cloud over the OSB sector in the next few years. Russell E Taylor is president of R E Taylor & Associates Ltd - Forest Industry Strategic Services, and Publisher of the WOOD Markets Monthly newsletter and WOOD Markets 2000 - The Five-Year Solid Wood Markets Outlook (Phone: 604-801-5996; email: firstname.lastname@example.org)
The demand for lumber and OSB is heavily tied to US housing starts that are not expected to reach the levels experienced in 2000-over 1.6 million housing starts until 2004 at the very earliest.
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