HOT MARKETS mean high lumber prices for Canada’s top producers

The current hot markets for lumber have resulted in soaring prices, but the last year has seen subdued production trends at Canada's top lumber producers, with some major companies seeing actual declines in production, due to the impact of forest fires and the ongoing impact of the mountain pine beetle.

By Russ Taylor

FEA Canada/WOOD MARKETS’ 2017 annual survey of the top 10 Canadian lumber producers featured mixed production trends in the west versus the east, despite a runaway lumber market in the U.S.

Of the top 10 companies, four in Western Canada recorded production declines — not the trend you’d expect during a time of near-record-high to record-high lumber prices.

North American Shipments: Up 1.2 per cent

Total North American softwood lumber shipments rose for the seventh consecutive year in 2017, but were up just 1.2 per cent versus 2016 (from 61.16 billion board feet to 61.90 billion board feet). Steady growth in the U.S. housing market, combined with strong activity in residential repair and remodelling and a favourable export market in China, did not result in any significant production gains, but it did yield very high prices.

Supply disruptions in western North America interacted with other events, leading to production stoppages or slowdowns. As a result, Canada’s total shipments declined by 1.7 per cent (-480 million board feet to 28.04 billion board feet), with total U.S. shipments gaining 3.7 per cent (+700 million board feet to 33.86 billion board feet).

The growth in U.S. shipments during the year was the strongest in the South—up 880 million board feet (+5.1 per cent) to 18.23 billion board feet; the West was at 14.04 billion board feet (+2.0 per cent). Shipments from Eastern Canada overall rose, led by Ontario with an increase of 270 million board feet to 2.37 billion board feet (+12.8 per cent), growth in Quebec of only 0.7 per cent, and a small (1 per cent) increase in Atlantic Canada.

Volume Drop in B.C.

All regions in Western Canada recorded declines, with the largest volume drop seen in B.C. (-700 million board feet to 12.92 billion board feet; -5.1 per cent). B.C. Interior mill production was constrained by forest fires, ongoing sawlog supply limitations caused by the mountain pine beetle infestation, and the implementation of duties on Canadian lumber exports to the United States.

The top 10 Canadian producers have seen their shipments grow at a slightly slower pace than the overall Canadian industry since 2014. In 2017, the softwood lumber shipments of the top 10 decreased marginally versus a larger decline in Canada as a whole (-1.4 per cent for the top 10; -1.7 per cent for Canada). The Canadian top 10 saw their output decline from 16.39 billion board feet in 2016 to 16.16 billion board feet last year, while their share of national production held at 57.6 per cent.

The drop in shipments is a function of many factors, but the implementation of import duties to the U.S. in early 2017 was one in particular that caused Canadian companies to re-evaluate their markets and mills—especially B.C. Interior mills (i.e., in terms of optimizing for anticipated changes in the log profile and projected reductions in overall timber supply).

Given the duties, Canadian mill investments in the U.S. South are proving very strategic due to ample timber supply in the region and high sawmilling margins (the result of subdued timber prices due to oversupply). There was one notable U.S. acquisition in 2017: West Fraser’s purchase of Gilman Lumber’s six sawmills. Currently, the collective U.S. mill count of West Fraser, Canfor and Interfor (45 mills) allows their sawmill operations to enjoy excellent diversification on both sides of the border.

Turning to the ranking of the top 10 Canadian firms, six were based in Western Canada and four in the East. The top five Canadian producers in 2017 were ranked as follows: West Fraser, Canfor, Resolute (to #3 from #4), Tolko (from #3 to #4), and J.D. Irving (of note, the latter’s Canadian production entered the top 5 for the first time). Collectively, these producers had production of 12.1 billion board feet (43.2 per cent of Canadian lumber output) versus 12.2 billion board feet in 2016. There were a few ranking changes in the top five list: West Fraser retained its top spot, increasing its output only incrementally to 3.80 billion board feet (+0.3 per cent) at 13 Canadian mills; Canfor stayed in second position with 3.74 billion board feet and recorded a small output decline of 43 million board feet (-1.1 per cent); Resolute moved into third spot and gained 167 million board feet (+9.1 per cent) to reach a healthy 2.01 billion board feet; Tolko placed fourth, with its output falling by 277 million board feet to 1.62 billion board feet (-14.6 per cent) after closing its Merritt, B.C. mill in Q1/17; and, at #5, J.D. Irving recorded 920 million board feet of production.

Wild Card for 2018

The wild card for 2018 is the extremely high level of U.S. lumber prices (inflated partly by the imposition of U.S. duties on Canadian lumber and also as a result of only small increases in North American lumber output). High prices attracted a 50 per cent increase in offshore exports in 2017 and there are a dozen new sawmill projects planned for the U.S. South. As a result, U.S. lumber production will be expanding, but at some point this new supply (and imports) will put negative pressure on prices. This will be discussed at length during WOOD MARKETS’ Global Softwood Log & Lumber Conference, to be held in Vancouver May 9–10, 2018.

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International WOOD MARKETS Group Inc. has provided industry and market expertise in the solid wood products field to its clients since 1993. The firm also publishes a number of strategic industry multi-client reports including its landmark WOOD Markets Monthly International Report (since 1996), the monthly China Bulletin (since 2007), and various five-year forecast reports. The company’s various conferences are key ways to inform producers, exporters and importers of key trends in global markets. Further information is available at www.woodmarkets.com

In August 2017, WOOD MARKETS was purchased by Forest Economic Advisors LLC (FEA) based in Massachusetts. Russ Taylor, formerly the President of the International Wood Markets Group, has assumed the role of Managing Director of FEA-Canada. Russ and his team will continue to spearhead the production of WOOD MARKETS’ key publications and Russ will remain available to lead 
independent research projects.