Still Looking Good
Things look good for lumber and panel products in 2000, but the following two years are expected to be much more competitive
By Russell E Taylor
The North American wood products industry can expect more good news for at least this year, according to the conclusions of a recent five-year lumber and panel products report on both North American and key offshore markets. While 2000 looks like it will be a continuation of 1999 for at least the first six to nine months of the year, the prospects of declining demand in the American market in 2001 and the onslaught of new Oriented Strand Board capacity in 2002 paints a cloudy longer term picture for the industry. Volume and prices in the US market should still be good in 2000, although not as strong as in 1999, which broke many records. Ongoing change will be the rule during the next few years in the North American wood products industry. Industry consolidation, wood and nonwood substitutes, offshore competition, distribution channel dynamics, ecommerce and the renewal of the Softwood Lumber Agreement in April 2001 will all be key challenges the industry needs to meet head on. This means that the industry needs to get ready for some tougher times ahead. Some parts or regions of the Canadian industry may not be ready for these leaner times, which should be of concern.
Softwood Lumber Global Lumber Outlook:
Despite the ongoing volatility of various market segments or sectors in different regions, the global lumber market trend has been trending slightly higher over the last six years. Since 1994's 310 million cubic metres (131 billion board feet), global softwood lumber consumption has remained in a narrow range between a low of 300 million cubic metres (127 billion board feet) in 1995 and a high of 323 million cubic metres (137 billion board feet) expected in 2000. This trend is a result of the offsetting market dynamics between the three major lumber consuming regions-the US, Japan and Europe.
Combined, they consume more than 70 per cent of the world's softwood lumber. The year 2000 should be the fifth consecutive year of increases in global lumber consumption, (a gain of 23 million cubic metres, or 10 billion board feet since 1994), when a slight decline in consumption in the red-hot US market will be more than offset by gains in Japan, Europe and Russia. Exporters will still be in search of markets in 2000, however, to move an ever-increasing volume of lumber output that keeps coming from both new and old sources. This means lumber prices will remain competitive in most offshore markets in comparison to more sheltered domestic markets in the US and, to a lesser degree, Europe.
Global Lumber Exporters:
Production rates for six European countries (Sweden, Finland, Austria, Germany, France and the Baltic States) and three Southern Hemisphere countries (New Zealand, Chile and Brazil) have collectively increased by almost 40 per cent in the 1990s-from 65 million cubic metres (27.5 billion board feet) to 89.5 million cubic metres (38 billion board feet). What is more profound is the growth rate in their exports-some 90 per cent-from 18.6 million cubic metres (8 billion board feet) to 35.4 million cubic metres (15 billion board feet). While these exports have been displacing North American production in key export markets, domestic producers now find these same producers right at their back door-the US market. As a result, US imports of softwood lumber from Europe and the Southern Hemisphere are forecast to soar from the current level of 900 million board feet to over two billion board feet by 2005-a conservative outlook that could end up significantly higher.
Note: Includes lumber produced only at primary sawmills & excludes all US production. * Includes acquisition volumes for all of 1999: - Weyerhaeuser acquisition of MacMillan Bloedel; - Canfor acquisition of Northwood; - West Fraser acquisition of Zeidler FP; - Donohue's 50% transfer of ownership of FFI from Slocan; - Tembec's acquisition of Crestbrook FP; - Tolko acquisition of High Level FP; 1 Estimate 2 Joint Venture portion only 3 Closures occurred in 1999 Source: R E Taylor & Associates Ltd. & International Wood Markets Research Inc. (Publishers of Wood Markets Quarterly newsletter & Wood Markets 2000 - The Solid Wood Products Outlook to 2004)
Canfor at the Top
It's official-Vancouver based Canfor Corporation can now lay claim to being Canada's top lumber producer. Research done by consultant R E Taylor & Associates Ltd. for Logging and Sawmilling Journal's annual list of Canada's Top 30 Softwood Lumber Producers shows that acquisitions have once again caused huge changes in the scale of Canada's top forest companies, and vaulted Canfor to the top. Canfor purchased Northwood Inc. in late 1999, pushing the company's lumber output to 2.327 billion board feet (if all of Northwood's 1999 volume is included with Canfor's). Canfor is now the undisputed king of SPF lumber with its 14 BC mills and two Alberta mills. This also positions Canfor well strategically, with a strong timber base, and will allow the firm to further expand its customer base in the US market. Weyerhaeuser Canada moves solidly into the number two position with 2.128 billion board feet following its acquisition of MacMillan Bloedel. As a result, Weyerhaeuser's 12 SPF mills (including three in Ontario) coupled with MB's six coastal and one custom cutting operation boosted its output by 860 million board feet compared to 1998.
Weyerhaeuser's production gap to #1 producer Canfor is about one half of what is actually reported: the "net production" volumes associated with four of MacMillan Bloedel's export mills do not report "nominal" volumes, which understates output by about 100 million board feet. West Fraser Timber takes the number three spot with 1.655 billion board feet-a sizable increase of 165 million board feet from 1998. West Fraser's purchase of Zeidler Forest Products added only a small lumber volume but moves its sawmill count to 12, including its three joint ownership mills. At number four is Quebec based Donohue, which increased its output mainly from acquiring the remaining 50 per cent ownership of Finlay Forest Industries from Slocan Forest Products. This puts Donohue's production at 1.485 billion board feet from its 12 Quebec mills and two BC mills. Last year's number one, Slocan, slips to number five spot with 1.37 billion board feet, mainly as a result of selling its interest in Finlay Forest Industries. While Slocan had one of the most spectacular financial turnarounds in recent memory, no other notable lumber production changes occurred at the company in 1999.
As in 1998, three other strong eastern Canadian companies occupied the next three consecutive positions. Tembec's 1.3 billion board feet of production from its 16 mills held the company's number six ranking, which includes its purchase of Crestbrook in early 1999. Privately owned Buchanan Lumber is ranked at number seven with an estimated 1.1 billion board feet from its seven Ontario mills, followed closely by Domtar at number eight with 1.070 billion board feet from its 12 mills in Ontario and Quebec. Rounding out the top 10 is Weldwood of Canada at number nine with 985 million board feet at seven mills, including three joint venture mills and its earlier purchase of Alberta's Sunpine Forest Products. Number 10 spot goes to another private company, Tolko Industries, with 930 million board feet. Tolko continues its steady advance in strategic acquisitions and added Alberta's High Level Forest Products in late 1999 to finally crack the top 10. The top 30 lumber producers accounted for 22 billion board feet, or 78.6% of Canada's total softwood lumber production of approximately 28 billion board feet in 1999.
The US Market:
Lumber demand in the US will remain remarkably consistent and stable for the five-year forecast period (2000 to 2004) based on strong US and global economic factors and monetary policy. The start of the millennium is forecast to yield favourable demand and prices for North American lumber producers. For the year 2000, the US market is predicted to have another spurt of almost unrelenting demand during a period of unprecedented economic growth (that started in 1991). However, consumption levels are expected to slow somewhat in 2000 and 2001 after 1999's record level performance. As well, substitutes to construction grade lumber (engineered wood as well as steel, plastic and vinyl) will be increasing at a rate of 500 million board feet per year. As well, softwood lumber exporters from Europe and the Southern Hemisphere are expected to increase exports to the US by 100 per cent. This will put pressure on some prices in the next few years until demand picks up in 2002. Total Canadian production of 28 billion board feet in 1999 was higher than in 1998 (27.2 billion board feet). The forecast is for softwood lumber output in 2000 to dip to almost 27.6 billion board feet and, for 2001, a minor drop to 27.5 billion board feet.
However, the terms of the Softwood Lumber Agreement after April 2001 will be the wild card in the softwood lumber scenario. Any "free trade" scenario is almost certain to favour Eastern Canadian and Prairie regions over British Columbia, given the current outrageous government imposed stumpage costs and logging regulations facing the BC industry. In 1999, US output of 36.4 billion board feet was the highest since 1989-due in part to the Softwood Lumber Agreement- and an increase of 1.7 billion board feet over 1998. The US West saw its production levels surge by almost one billion board feet between 1998 and 1999 while the US South gained 600 million board feet. From 2000 to 2004, all US regions will address different resource issues, but total US lumber production is expected to move lower toward a sustainable level of about 35 billion board feet by 2001. Improving export markets and the continuation of the Softwood Lumber Agreement until early 2001 are all good news stories that support healthy market conditions and favourable US prices for 2000.
Compared to 1999, US average annual lumber prices are expected to be off by only two to four per cent in 2000 while most export prices (except green hemlock in Japan) should be improving. Coupled with more competitive markets between 2001 and 2003 as well as slightly lower growth in the US economy, price levels are expected to ease off further compared to 1999 or 2000. North American forest industry corporate consolidations, distribution chain dynamics and Internet electronic business applications will impact the status quo of the lumber industry to a much greater extent than at any other time in its history. Global competition will continue to accelerate and this will require producers to develop strategic market plans that consider a much bigger picture with more competitors than ever before.
Plywood/Oriented Strand Board:
The industry is planning for another wave of new OSB plants starting in 2001. While 2000 looks like it will be another great year for structural panels, the same cannot be said of the subsequent years. The reason? Simply too much capacity. There was record structural panel consumption in North America in 1999-an estimated 39.4 billion square feet (34.9 million cubic metres) of softwood plywood and OSB. Increased demand was due chiefly to soaring housing starts and greater use of panels (including engineered Ibeams) for each new residential housing start. The 2000 to 2004 forecast for North American structural panel consumption looks relatively static, however. Consumption in the years 2000 and 2001 will decline slightly due to lower housing starts and Gross Domestic Product, but demand should pick up again in 2002 and 2003. However, the forecast indicates that consumption levels attained in 2003 will be very near those achieved in 1999; in other words, the potential for a three to four-year demand relapse is high until consumption levels attain the pace of the late 1990s toward the end of the five-year forecast. North American OSB capacity is now expected to ramp up from 20.9 billion square feet in 1999 to more than 28.4 billion square feet by 2004. Of this, incremental capacity "creep", or additions, at existing plants will amount to about two billion square feet over the five-year forecast period, while new installations and expansions at up to 10 locations will add the balance of new capacity (up to six billion square feet). Increasing competition from OSB caused US southern plywood to peak in 1996 at 13.35 billion square feet. In 1999, output is estimated at 12.3 billion square feet, as strong demand provided a reprieve against further closures during the year.
The forecast to 2004 is for severe competition for sheathing plywood producers from OSB- competition that could lead to US plywood output plunging to well under 11 billion square feet. This potential downturn can be mitigated if nonsheathing products or markets can be created, or if the overall demand dynamics improve to reduce the substitution pressure of OSB. Weak export markets will see a big reversal. Over the forecast period to 2004, North American plywood exports are forecast to bounce back 60 per cent and OSB exports by 75 per cent. The good news is that OSB and plywood prices should be strong in 2000-and maybe even stronger than forecast-as little new capacity will influence supply while US housing demand could still be very strong. However, the small increases in output, in combination with slightly lower demand, will cause prices to ease somewhat, especially by the second half of 2000.
This should result in average prices for 2000 that will be about 17 per cent lower than 1999's near record average of $260 US per thousand square feet, but still at prices that are 100 per cent above cash costs. Given plywood's cost structure and the huge volumes of new OSB capacity starting in 2001, sheathing plywood prices will experience much greater downward price pressure during the coming few years. For sheathing plywood, the price forecast in North America is for it to fall by up to 20 per cent in 2000-a point that is getting close to breakeven levels for many mills, especially those in the US. Further price weakness is forecast from 2001 to 2003. Excess OSB and plywood capacity in both Canada and the US will force production/ capacity rates to as low as 85 per cent from the lofty rates of over 97 per cent in 1999. The plywood production area in both Canada and the US is expected to see a continuation of the gradual erosion in plywood capacity and output through to 2004. However, the high qualities of Canadian CSP and Douglas fir plywood may continue to offer a unique fit in the US market, allowing output and prices to become more stable.
Russell E Taylor is Managing Director and Publisher, International Wood Markets Research Inc., and President, R E Taylor & Associates Ltd., of Vancouver. He has just published the 400 page Wood Markets 2000 report and regularly produces the newsletter Wood Markets Quarterly - North America's leading strategic solid wood report.
This page last modified on Monday, November 03, 2003