By Reg Barclay
Copyright 1997. Contact publisher for permission to use.

A year ago, the concensus of economic pulse takers looking at the US economy was "not too hot, not too cold." That turned out to be fairly accurate and the year ahead appears to hold more of the same.

That is the view held by, amongst others, Joshua Mendelsohn, chief economist for the Canadian Imperial Bank of Commerce. Mendelsohn, one of 12 feature speakers at a recent Charles Widman-sponsored conference in Vancouver, points to a moderately growing GDP in the US and foresees a continuing stable, growing economy, with low inflation and low interest rates.

Looking at the supply-demand picture for US lumber, Jim Yuhas, of the Portland-based Western Wood Products Association (WWPA) predicted that housing starts in the US will be slightly lower - by about five per cent - from 1.450 to 1.375 million. Repair and remodelling will be down by 5.3 per cent, while the non-residential and industrial sectors will remain unchanged.

Not included in housing starts, and often overlooked in importance as a demand factor, are factory-built homes. Bob Lindal of Lindal Cedar Homes estimated production at 365,000 units, or 25 per cent of starts in 1996, which is expected to increase by three per cent to 375,000 units in 1997.

US supply, the other side of the supply-demand equation, has peaked, according to Yuhas, and will be slightly lower (one to two per cent) at 32.9 billion fbm. This will somewhat balance the reduced housing starts.

Demand for 1997 is estimated at 48.0 billion fbm and the gap between US supply of 31.3 billion fbm (after deducting exports of 1.6 billion fbm) will be filled by imports; 16.2 billion fbm from Canada and 0.5 billion fbm from other suppliers, mainly South America. The Canadian import figures represent a six per-cent decline from 1996, while other imports represent a 25 per-cent increase.

The quota on Canadian lumber shipments to the US will obviously play a major part in the scenario in the coming year. As Widman points out, in the past the the US market has been free and open, with volume flows governed by price. This has now changed with the quota agreement, which imposes something of a wild card element to supply-demand calculations.

The quota from the four largest exporting provinces (BC, Alberta, Ontario and Quebec) for 1997 will be 14.7 billion fbm and is based on 1995 shipments less 10 per cent. Another billion fbm from the smaller exporting provinces will be permitted outside the quota. This totals 15.7 billion fbm, which, interestingly enough, is short of the 16.2 billion fbm forecast by the WWPA. This raises the question of how demand will be balanced. Clearly it implies higher prices, which is what the Coalition of US Mills wants. What the actual result will be, however, only time will tell. The substantial penalties for exceeding the quota will affect price at least partially; a penalty of $50/M is assessed for the first 3.5 per cent and $100/M for the excess thereafter.

The real complication, however, is that the quota is controlled quarterly, with four shipments of 25 per cent in a 12-month period ending in March. Thus the 1996 quota year ends in March 1997. To make matters even more complex, mills are permitted to increase their shipments up to 28.8 per cent in any quarter, providing they balance over 12 months with their given quota. With virtually all wholesalers in the US buying on a just-in-time basis, business for both mills and buyers will be a scramble most of the time.

Continued price volatility seems certain. Prices have been reported as low as $248 US in January, to a high recently of $480 US per Mfbm for 2x4 western SPF. In talking to mills at the Conference, many are already out of quota for January to March, 1997, the last quarter of the 1996 quota year. They are not sure if buyers will pay a price, including all or part of the penalty, or if mills will have to shut down.

It will take some time to adjust to the new quota system, but Canadian mills face a challenge in deciding how to handle the two-billion fbm difference between 1995 shipments to the US and the quota for 1997. This is substantial, and it is wood that, at this writing, does not have an assured home. It seems likely that overseas exports will be the destination for at least a part of this volume. Fortunately, the Canadian market will be able to consume about 800 million fbm more lumber in 1997 than 1996, according to market specialists, with stronger economic growth and stronger housing starts, up from 125,500 to 135,000 in 1997.

The allocation of quota by the federal government to provinces is another wild card. BC received 75 to 85 per cent of 1995 shipments, Alberta 65 to 70 per cent, Ontario 60 to 70 per cent, and Quebec 60 to 65 per cent. This is bad news for eastern shippers, and several Quebec firms have launched legal action against the federal government. The problem is that considerable new capacity was put in place in eastern Canada very recently, and has not had time to establish a US shipments history. Some new mills received quota of only 10 to 20 per cent.

Remanufacturers in BC were also hit hard, with quota ranging from 10 to 50 per cent. In this situation, overseas markets such as the UK, Continental Europe, North Africa and the Mideast will be under close scrutiny by eastern mills for export opportunities.

Mike Apsey, president of the Council of Forest Industries of BC, doesn't see the quota as all bad. He considers it the better course than, say, an ongoing US trade action battle. Mills, at least, are getting higher prices for their US shipments and 1997 could see even stronger prices. Nevertheless, the quota seems unfair to Canada as shippers from other parts of the world do not face restrictions on shipments to the US, and could increase their share of the market at Canada's expense.

Higher prices are the hope of the Coalition of US Mills, whose trade action resulted in the quota, but this may backfire. On one hand, US production may increase in response to higher prices. In fact, production in the first eight months of 1996 was up four per cent over 1995. But with higher prices buyers may increasingly turn away from lumber to alternative building products.

Weyerhaeuser's Bill Walters notes that engineered wood products such as I-Beams (wood, but not lumber) topped $1 billion in sales for the first time recently, based on performance and stable pricing.

Fortunately for Canadian wood products exporters, the outlook for worldwide markets is for stable and sustained growth through 1997 and beyond..

Mendelsohn did sound a note of caution about the US outlook for 1997. While GDP growth will be stronger, growth momentum may build to the point where there is a perception of overheating, and the federal reserve may feel the need for a small increase in interest rates. This will likely not be major enough to affect housing demand, but will certainly disrupt financial markets in the US and worldwide markets, which tend to follow.

The story for panel products for 1997 is one of oversupply. Prices of both MDF and OSB dropped to new lows in 1996, as the rush to build new capacity continues, far exceeding the few closures of older, higher-cost plants. According to David McNeil of Tolko Industries, a further three billion SF of capacity is planned for 1997. A competitive market will continue and an average price is forecast of $156 per M, 7/16'' NC basis.

"The market is maturing," McNeil said, "and to survive, mills must get away from low price competition with plywood in the sheathing market and focus on niche markets and new product development." As an example of what Tolko is doing, he described a new light-weight OSB panel, 4'x16' in size, developed for factory-built homes. The new plant in High Prairie, Alberta has the world's first 12'-wide press line, which will provide more flexibility in producing the sizes customers want.

Outlining MDF's remarkable growth, Willamette Industries' David Smith cited production increases from 9 million m3 in 1993 to 15 million m3 in 1996, with 20 million m3 forecast for the year 2000. He noted that the market in North America has grown 2.5 times in the last decade, but with current plant over-capacity some skake-out in the industry can be expected unless new uses for MDF are developed. Excess supply will continue for a few years and the edge will be with established producers that have a favourable cost structure and established customers.

The phenomenal growth in overseas MDF markets, particularly southeast Asia, means that US producers no longer can count on exports to sell their surplus supply. Future growth will come from expanding distribution in the domestic market to smaller shops and the do-it-yourself sector. Willamette now represents five per cent of global capacity and 16 per cent of North American capacity.