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IMPROVEMENTS ON THE WAY
Lumber and panel prices should improve
over the next two years, despite the rollercoaster ride of 2002.
By Russell E Taylor
The outlook for lumber and panel demand,
production and prices over the next two years looks to improve despite all
the highs and lows that were experienced in 2002. According to the latest
outlook conducted by Vancouver-based R E Taylor & Associates and WOOD
Markets Monthly newsletter, some modest improvements are expected in all
markets in 2003 followed by some even better results in 2004.
lumber output plunged by 1.6 billion board feet in 2001, but has
rebounded by 1.7 billion feet in 2002 to an estimated 29.5 billion
Softwood Lumber Outlook: 2003/2004
Weak prices immersed the North American lumber industry into unsettled
times in 2002. While it is unlikely that lumber prices can remain mired at
10-year lows, we also don’t see any easy way out of the oversupplied
market in 2003. We expect that a combination of cures will be needed to
save the market in 2003, for example political resolution between the US
and Canadian governments, and a return to more normal supply and demand
US Demand Should Remain Strong
For 2002, US lumber consumption is expected to reach 55 billion board
feet—a modern-day record. Low interest rates have fuelled lumber
consumption in both new residential construction, and repair and
remodelling—a trend expected to continue into 2003 and 2004. The following
demand drivers are anticipated to impact 2003’s results:
* The US Federal Reserve continues to
engineer a low interest rate environment in an attempt to stimulate
consumer spending and investments in housing and improvements. The Federal
Reserve rate will average just 1.7 per cent in 2002 and is expected to be
similar for 2003, and then rise in 2004.
* Total US housing starts were 1.67 million units in 2002, the highest
level in 16 years. Single-family starts are the real story: they should
hit close to 1.345 million units, setting another record. For 2003, a
slight dip is expected, but housing starts should still reach a very
respectable 1.63 million, representing a three per cent drop from 2002.
* Single-family starts are expected to drop by only 3.3 per cent in 2003
to 1.3 million units. * Multi-family housing starts are expected to remain
in the 330,000 to 340,000 range, where they have been since 1997.
* Real US GDP growth is forecast to be 2.5 per cent in 2002 and growth
should be a further 2.8 to three per cent in 2003.
* Imported softwood lumber from Europe and the Southern Hemisphere will
account for over 2.3 billion board feet (European volumes converted to a
nominal basis) in 2002, or 4.1 per cent of consumption and 11 per cent of
While lower prices slowed down European
structural lumber shipments to the US in the fourth quarter of 2002, total
non-Canadian imports are expected to grow marginally in 2003, and could
reach 2.6 billon board feet in 2004—and much higher if prices rise sooner.
For 2003, strong demand fundamentals and favourable interest rates and
economic growth should permit US lumber consumption to reach 55.4 billion
board feet, a modest 380 million board feet (+0.7 per cent) increase over
2002. For 2004, a 2.5 per cent increase to 56.8 billion board feet is
forecast as housing starts soar once again.
duties were imposed in May 2001, lumber output remained surprisingly
high in the west, although it was off by seven per cent in Ontario
The greatest factor that can influence North American markets in 2003 will
be negotiations between the US and Canada on the countervailing and
anti-dumping duties. It is unclear, however, whether a negotiated
settlement will actually improve prices or simply allow for unrestricted
trade between the two countries. The latter would not solve the excess
capacity situation. Normal supply and demand forces have been altered
because of the duties and this is still the greatest factor driving the
production (and curtailment) strategies of companies on both sides of the
border. Our forecasts do not include any changes to the current US trade
law on Canadian imports.
Rising Lumber Production
There is still excess lumber capacity in North America. With increasing
imports, decreasing offshore exports and increased consumption of
engineered wood products and non-wood substitutes, the lumber sector is
under pressure. And, despite record demand levels and over-production, the
North American lumber industry is operating at or near an 85 per cent
capacity rate. (It is theoretically capable of producing well over 70
billion board feet—another five to seven billion board feet.)
The only good news is that low lumber
prices will squeeze out some of the excess capacity as mills close
throughout North America. While there are a few new mills being built, the
“capacity-creep” at most North American mills continues to be a concern,
especially given their ongoing challenge to become lower-cost producers.
Our forecast for 2003 and 2004 assumes
that the necessary supply response to reduce sawmill capacity will come
from both sides of the border. Although it is complex to predict which
regions might be the winners or losers, it appears the curtailment pain
will be shared relatively equally between Canada and the US, with Eastern
Canada and the US South now expected to bear most of the short-term brunt.
US output is forecast to reach 34.9 billion board feet in 2002, up
slightly from 2001’s 34.65 billion board feet—but should dip in 2003 to
34.8 billion board feet. The US South has been impacted the most in 2002,
and modest gains in output are not expected until 2004.
Canada’s lumber output plunged by 1.6
billion board feet in 2001, but has rebounded by 1.7 billion board feet in
2002, to an expected 29.5 billion board feet. Canadians used a number of
“windows” when duties were not in place to increase output during the
first half of the year. Even after duties were imposed in late May, output
remained surprisingly high in the West, although it was off by seven per
cent in Ontario and Quebec. The outlook calls for total Canadian
production to decrease marginally to 29.4 billion board feet in 2003, and
rise to almost 30 billion board feet in 2004.
of lumber to the US are expected to be near 18.6 billion board feet
in 2002, around the same level as 2001.
Canadian Exports to the US Rising
Canadian lumber exports to the US have risen since 1994 despite quotas and
duties. However, Canada’s share of US consumption continues to remain
narrowly fixed at 34 to 35 per cent—partly as a result of quotas and
duties. For 2002, Canadian shipments to the US are expected to be near
18.6 billion board feet, around 2001’s level. With the US becoming an
increasingly important market for Canadians, the outlook calls for a
modest expansion of exports in 2003 to 19.2 billion board feet, and moving
even higher in 2004 to 19.6 billion board feet, even assuming that duties
remain in place.
Offshore Exports Down, Imports to Rise
Offshore exports from both Canada and the US continue to slide. US
offshore shipments are expected to have plunged below 500 million board
feet in 2002, from 1.5 billion in 1995. This declining trend is expected
to continue, especially if the US currency remains strong. Canadian
offshore exports are also expected to slip in 2002—to just 1.85 billion
board feet—as shipments to Japan plummeted by 16 per cent. For 2003 and
2004, offshore shipments are expected to hold near current levels as new
markets, such as China and other Asian countries, are explored.
It looks like another tough year for lumber in 2003 unless a negotiated
trade settlement can be reached to improve lumber’s pricing prospects.
Annual average dimension prices in 2003 are expected to be similar to the
average of 2002. However, the big difference is that 2003 prices should
start out from the bottom and work higher—the exact opposite of 2002’s
results. There are always hidden surprises in the North American market
and hopefully, for a change, they will be positive in 2003.
OSB/Plywood Outlook: 2003/2004
After a shaky year in 2002, when scheduled OSB curtailments became a fact
of business, and despite record-high demand for both plywood and OSB, the
market outlook for 2003 and 2004 is starting to look good again. However,
a number of supply-based factors, particularly rising domestic capacity
and offshore imports, could impact structural panel markets negatively and
cause prices to sputter once again in 2003. However, 2004 appears to have
the potential to be a breakout year.
OSB/plywood producers should benefit from relatively strong US
housing starts—they are forecast to dip, but only by three per cent
to 1.63 million.
Consumption Growth Expected
Once again, our forecast is bullish on US consumption for structural
panels: demand is expected to set new records over the next two years.
Strong housing starts and low interest rates, coupled with GDP growth, are
the most important drivers of structural panel markets. For 2003, a slight
dip in housing starts is expected, but they should still reach a very
respectable 1.63 million units, compared to 1.67 million in 2002. In 2004,
housing starts of 1.65 to 1.7 million units are forecast, and this should
create strong demand for structural panels.
Real US GDP is forecast to inch higher in
2003—with growth of from 2.8 to three per cent—and move higher again in
2004. The only spoiler is the possibility of a war in the Persian Gulf and
its unknown spillover effects. The record for North American plywood and
OSB consumption—40.2 billion square feet set in 2002—should be broken
again in both 2003 and 2004, with levels of 41 and 42.6 billion square
feet respectively. US structural panel consumption is expected to reach
37.7 billion square feet in 2003—a 500 million square feet increase from
2002. In 2004, demand of 39.3 billion square feet is forecast, based on
projected housing starts and repair and remodeling activity.
Canadian demand for OSB and plywood hit a
12-year high in 2002 at more than three billion square feet. Gains are
anticipated in 2003 (3.37 billion square feet) and 2004 (3.27 billion
square feet). However, the bulk of Canada’s plywood and OSB exports will
target the US market. In 2002, the US represented 97 per cent of Canada’s
OSB exports and 76 per cent of its plywood shipments. No growth is
forecast in Canadian or US offshore exports over the next two years: it
will be the US market that supports both industries. The major limiting
factor for OSB will continue to be its restricted focus on the residential
housing market. Plywood’s future in sheathing end-uses will continue to be
displaced by OSB; an ongoing expansion into specialty and industrial
markets is needed.
lumber exports to the US have risen since 1994, Canada’s share of US
consumption continues to remain narrowly fixed at 34 to 35 per cent.
The saving grace for North American OSB producers is the limited planned
new capacity. The latest capacity additions—five new plants and one
expansion—started up in 2000/01. No new OSB mills started up in 2002, and
the next two are expected to be running only early in 2004. There are no
official announcements for any new plant start-ups in 2005, although three
independent projects are in various stages of planning. Reductions in US
plywood capacity are expected, but not until 2005. If a faster plywood
curtailment rate occurs, OSB and imports will be the main beneficiaries.
Output To Climb
The competitive advantage OSB holds over sheathing plywood is its lower
cost structure. This has made OSB one of the success stories in the wood
products sector worldwide. In North America, the two new plants will allow
OSB production to rise, beginning in early 2004. The following are some of
the main trends in structural panels production expected over the next two
* US OSB output: Forecast to reach 13.6 billion square feet in 2003 and
14.4 billion square feet in 2004, from 13.4 billion square feet in 2002.
* Canadian OSB production: Projected to show similar volume growth, ie
production rising to 9.9 billion square feet in 2003 and 10.5 billion
square feet in 2004 (from 9.4 billion square feet in 2002).
* US plywood output: Forecast to remain steady near 2002’s 15.2 billion
square feet in 2003 and 2004.
* Canadian plywood production: Forecast to hold near current levels, ie
around 2.4 billion square feet in 2003 and 2.45 billion in 2004 (from 2.4
billion square feet in 2002). While OSB production growth will be driven
by incremental and some new capacity, many US sheathing plywood plants
will be in sheer survival mode.
Exports Flat, Imports Soaring
Offshore OSB and plywood export markets for the US and Canada are expected
to remain unchanged at historically low levels. Low-cost, weak-currency
countries continue to enjoy cost advantages over North American exporters.
In 2002, imports from offshore were still surging: both South American
softwood plywood (+100 million square feet) and European OSB (+150 million
square feet) have recorded large rises. Collectively, non-Canadian plywood
and OSB imports reached 560 million square feet and are expected to exceed
700 million square feet in 2004.
The supply/demand outlook for structural panels in 2003 points to small
but steady improvements in demand, with limited increases in OSB capacity.
High-cost sheathing plywood remains vulnerable to OSB and significant
capacity reductions are anticipated after 2004—although this may be an
optimistic outlook. With only two new OSB plants scheduled for 2004 and no
firm commitments yet for 2005, OSB operating rates and prices should
improve modestly in 2003 and more rapidly in 2004. As we saw in 2002, an
excess of supply can quickly push operating rates and prices lower,
regardless of the market’s strength (as the softwood lumber sector knows
only too well). As in the second half of 2002, effective supply management
by the larger producers during periods of slow demand will have a direct
impact on price levels in 2003.
Russell E. Taylor is President of R E
Taylor & Associates Ltd – Forest Industry Strategic Services, & Publisher,
WOOD Markets Monthly newsletter & WOOD Markets 2002 (Ph: 604-801-5996;
e-mail: firstname.lastname@example.org ;
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