March 2002 - Logging and Sawmilling Journal -

The outlook for 2002/2003 sees lumber and panel prices improving, with a balanced and expanding market.

The outlook for lumber and panel demand, production and prices over the next two years looks very good despite all the gloom and doom that has entangled the wood products industry since late 2000. According to the latest five-year outlook published in WOOD Markets 2002 - The Five-Year Solid Wood Products Outlook: 2002- 2006, some modest improvements are expected in all markets this year, followed by even better results in 2003 and 2004.

Softwood Lumber Outlook
In the second half of 2001, the wood products industry faced a double-edged sword: economic recessionary pressures, a positive for the industry because they also led to very low interest rates, and the aftermath of the September terrorist attacks. While overall lumber demand was good last year, the general slowdown -in combination with excess lumber capacity, rising imports and increased non-wood substitutes-caused lumber prices to slump badly in the fourth quarter.

US lumber demand has been remarkably strong for the last five years. From 1999's peak of 54.3 billion board feet (128 million cubic metres), consumption in 2001 was off by only 680 million board feet (down 1.25 per cent), to 53.65 billion board feet. Consumption for 2002 is expected to increase marginally over 2001-by 230 million board feet for a total of 53.88 billion board feet-for the following reasons:

US/Canada Trade
The uncertainty over the outcome of negotiations between the US and Canada over trade issues on softwood lumber confounds any forecast. The dispute is now purely political and legal- the real facts of the issue have become secondary-and the likely outcome appears to be some kind of trade deal between the two countries. While Canada has little chance of winning due to the structure of US trade laws, it does have the option of going to the World Trade Organization (WTO) for resolution.

Unfortunately, a final WTO hearing would take years, so this appears to be only a desperation option. Our "base-case" forecast assumes that the some "deal" will be struck between the two sides on softwood lumber and we are assuming that a 15 per cent "Goldilocks tax" will be paid in some manner by Canadian shippers to the US for an undetermined period.

The 15 per cent rate is considered a realistic mid-point: not too hot for Canadians and not too cold for American interests, but it could be higher if no deal can be arranged and the ITC is allowed to make its final determination on May 6. All of this uncertainty can only lead lumber prices to creep up as Canadian mills try to build contingencies into their production and/or pricing strategies.

Rising Production
While capacity creep at many North American mills has been rising steadily, there are more and more sawmill closures being announced and this will aid in balancing overall lumber supply. WOOD Markets' forecast assumes that the supply response to improving market conditions will occur on both sides of the border in 2002 and 2003. Following Canada's one billion board feet plunge from 2000 to 2001 to 28.0 billion board feet, lumber output in 2002 is expected to recover half of its drop and expand to 28.5 billion board feet- even if US Canada softwood negotiations lead to shipments being penalized at around 15 per cent. US output is expected to stay in a holding pattern for most of 2002 and production is forecast to move marginally higher, to 34.7 billion board feet, from 34.6 billion board feet in 2001. In 2003, the prospects of stronger North American lumber demand should allow for big gains in output: Canadian production is forecast to rise by 750 million board feet (up 2.6 per cent) to 29.3 billion board feet, while American output could jump by 850 million board feet (up 2.5 per cent) to 35.6 billion board feet.

Stable Canadian Exports to the US
Canadian lumber exports to the US have risen slowly each year since 1991 despite the restrictions of the Softwood Lumber Agreement (1996-2000) and the CVD/AD petitions (2001). With a market share of US consumption averaging a consistent 34 per cent over the last ten years, Canadian shipments to the US have simply grown with US demand. Canadian exports to the US were about 18.4 billion board feet in 2001 and are expected to be flat in 2002 at 18.3 billion board feet before creeping higher in 2003 to 18.7 billion board feet.

Total lumber production for Canada's Top 30 Lumber Producers in 2001 was 22.06 billion board feet, down from 22.6 billion board feet in 2000. gotiations is the biggest

Offshore Exports Flat, Imports to Rise
Offshore exports from both Canada and the US were weak in 2001 and a similar situation is expected over the next few years due to North America's strong currency and intensely competitive export markets. Imports into the US from offshore suppliers are a different story (also see WOOD Market Monthly November and June 2001 issues). Imported structural lumber and studs, as well as knotty boards, are expected to make further inroads from Europe into the US in 2002, as are imported clear pine lumber, blocks, blanks and mouldings from the Southern Hemisphere. Currency gains and rising incremental volumes of timber and lumber will continue to drive up imports into the US, where they should break the two billion board feet barrier (3.5 per cent of US consumption) as early as 2003.

The good news is that OSB and plywood prices should be even stronger in 2003, as new OSB capacity will not be entering the market until mid-2003 at the earliest.

Prices to Rise
There is finally some market news that should positively influence lumber prices in 2002 and especially 2003. If excess lumber capacity can continue to be managed through planned curtailments and/or closures of uneconomic capacity-as occurred throughout 2001-then rising prices due to increased US demand are likely. Consequently, prices for the benchmark W-SPF 2x4 random length lumber should average US$263 per thousand board feet (base price and before any duties on US-bound shipments from Canada) in 2002, up from US$250 in 2001. WOOD Markets 2002 is forecasting a higher average price of US$267 per thousand board feet for 2003 before prices move even higher in 2004. It is possible the economic cycle could advance sooner, leading to even higher prices in 2003. As a result, market conditions and prices look much brighter for 2002 and 2003. The outcome of the US-Canada softwood lumber negotiations is the biggest wild card in how supply, demand and prices will all balance out over the short-term.

OSB/Plywood Outlook
The 2002-2003 forecast for North American structural panel consumption looks relatively positive: consumption is expected to rise almost unabated over the next three to five years given generally positive economic and housing outlooks. According to the analysis in WOOD Markets 2002, the dominant variables impacting the outlook and the pace of growth include US housing starts, interest rates, currency rates, consumer confidence (especially since September 11) and the strength of the economy. Reserve Board-US lumber demand has been strong. Canadian consumption also looks favourable: housing starts are expected to inch higher, surpassing 150,000 for the 2002-2003 period. However, since 87 per cent of all Canadian OSB output will be consumed in the US market over the next five year period, any unforeseen slowdown in US demand or a surplus in North American supply will hit Canadian producers hard and quickly. Without any improvement in the Asian economy, Canadian plywood and OSB exports will be limited in offshore markets. The growing acceptance of Canadian plywood in the United States is also a positive factor that has contributed to a rejuvenation of the industry. But like OSB, Canadian plywood is now more heavily levered to the fortunes of the US market. However, a strengthening Canadian currency relative to the US dollar during the forecast period could be a negative factor for US-bound exports.

OSB Capacity
Fortunately, no new OSB mills will be starting up in 2002, as most companies were scared off by the prospect of too much OSB capacity; this resulted in delays in numerous proposals, a fortuitous outcome. The next wave starts with new capacity installations between mid- 2003 and 2005/06, when 10 to 11 OSB mills are scheduled or planned, representing almost 8.5 billion square feet, an increase of 40 per cent from the OSB capacity installed as of 2001.

Production To Rise
Unlike the 2 billion square foot drop in output in US plywood in 2001, no net production declines are forecast for Canadian plywood output as, ironically, the US has become Canada's largest plywood export market for both Douglas fir and spruce. All of the North American capacity decreases in the next few years are expected to come from US sheathing plywood producers.

Improving Prices
With stable (but very strong) housing starts forecast for 2002 but with incremental capacity increasing from the four new North American OSB mills established in 2001 as well as imports, prices are expected to rise marginally in 2002 to an average price of US$168 per thousand square feet, slightly above 2001's level of US$160. The good news is that OSB and plywood prices should be even stronger in 2003-rising to about US$198 and maybe even stronger than our forecast indicates-as new OSB capacity will not be entering the market until mid-2003 at the earliest, allowing OSB operating rates and prices to rise. As a result, market conditions and prices appear to be looking much brighter for both lumber and panel products in 2002 and 2003.

Russell E Taylor is President, RE Taylor & Associates Ltd - Forest Industry Strategic Services, & Publisher, WOOD Markets monthly newsletter & WOOD Markets 2002 (Phone: 604-801-5996;
e-mail: retaylor@woodmrkts.com; www.woodmarkets.com).
The full five-year lumber and panel forecast is available in the 500+-page report, WOOD Markets 2002 - The Five-Year Solid Wood Products Outlook: 2002-2006.

Main Page