March 2001 - Logging and Sawmilling Journal -

Tough lumber and OSB markets are expected this year, but the expiry of the Softwood Lumber Agreement with the US represents the wild card in the market scenario.

The erosion of lumber prices to 10 year lows in early 2001 has started to cause panic among lumber producers. OSB producers are facing a similar scenario as prices plunged at the start of 2001 to five year lows. While a diagnosis of the problem is very simple-too much supply chasing a slowing demand-a prescription is much more complicated and it's likely to take most of this year to create some solutions. As a result, the outlook for lumber and panel products calls for continuing weak prices in the short term until further and substantial supply curtailments occur in both lumber and structural panels to allow prices to move higher.

When North American softwood lumber prices starting plunging in the second quarter of 2000, few realized how low they would go or how long this situation would last. Looking out to 2001, all the evidence now points to a continuation of an oversupplied market combined with slowing demand, although at still very high levels. In the lumber supply and demand forecast, the assumption is made that the five-year experiment with the Softwood Lumber Agreement (SLA) will end and it will not be renewed after March 31, 2001. It's expected that the Canadian side will negotiate for free trade with the US, causing the Americans to then institute, or at least threaten to impose, a countervailing duty action in April.

If this is indeed the outcome-and it could very well change through new negotiations or political posturing at anytime in the first quarter of 2001 right up until the eleventh hour-Canadian lumber could then start to be allowed to enter the US without the need for quotas. This is at least until the Americans rule if Canadian lumber is "subsidized" or has caused injury to American producers and they do not impose retroactive duties on lumber from April 1 (another wrinkle that could confuse markets in April). Consequently, more uncertainty is looming for lumber producers and buyers as the end of the SLA looms.

This countervail action has many variations, but the initial evaluation on injury to American producers is likely to be finished by August, 2001. After that, bonds at the preliminary duty rate would be required on all Canadian shipments to the US assuming that the initial ruling goes against Canadian producers. This window of time (April to July or August) could offer Canadian shippers the opportunity to ship unlimited volumes to the US, including the temptation to transport unsold lumber across the border before potential bonds are required.

The final decision regarding whether a countervailing duty is to be assessed on Canadian exports to the US- as well as the amount of the duty: estimates range from zero to 20 per cent-could be delivered as late as December 2001, yielding a most uncertain and volatile market for all of the year. The forecast expects weak prices to limit the rumoured "flood" of Canadian lumber into the US. Although stockpiling practices on the US side may occur, it will be to a limited extent. If the SLA is not renewed, discipline will be required by Canadian shippers to maintain a balance of supply relative to demand or else prices could remain near the dreadful lows already achieved in 2001. This is extremely critical since the major Canadian producing regions all had some excess capacity in 2000 that has been underutilized because of quota restrictions imposed by the SLA.

Rank 1999	Rank 2000	Company	# of Mills	Prod (million board feet)
1	1	Canfor	13	2,254
2	2	Weyerhaeuser Canada ¹	18	2,200
18	3	Abitibi- Consolidated^1,2,3	22	1,917
3	4	West Fraser Timber ^2,3	13	1,682
5	5	Slocan Group	11	1,385
6	6	Tembec	14	1,320
7	7	Buchanan Lumber	7	1,100
8	8	Domtar	13	1,078
9	9	Weldwood ²	7	1,007
10	10	Tolko	6	903
11	11	JD Irving	12	773
12	12	Doman	9	773
13	13	Riverside	5	683
18	14	Interfor¹	6	621
14	15	Alliance	9	583
16	16	Kruger ^{1, 2}	8	450
17	17	Pope & Talbot	3	450
25	18	Nexfor3	4	376
19	19	Sinclar Group^{1, 2}	4	375
20	20	Uniforet	2	368
22	21	Barrette Chapais	3	355
21	22	Skeena Cellulose	4	314
23	23	Millar Western	2	285
24	24	Primex	2	253
26	25	Lignum	1	228
27	26	Materiaux Blanchet	2	207
28	27	Gerard Crete & Fils	3	209
N/A	28	Chantier Chibougamau	1	200
30	29	Ainsworth	1	145
29	30	Carrier Lumber	4	115
Total Top 30 209 22,609, Total Canada 27,742
Note: Includes lumber produced only at primary sawmills & excludes all US production. 1 Estimate 2 Includes Joint Venture volumes 3 Includes acquistion volumes in 2000 Source: RE Taylor & Associates Ltd & International Wood Markets Research Inc (Publishers of WOOD Markets Monthly newsletter & WOOD Markets 2000 - The Solid Wood Products Outlook to 2004)

Canfor Remains Canada's Top Producer

The numbers are in and it's now official-BC based Canfor Corporation was Canada's largest lumber producer in 2000, taking top spot in Logging and Sawmilling Journal's annual list of Canada's Top 30 Lumber Producers for the second year in a row. Unlike last year's list, which showed significant shifts in position due to a number of major takeovers in the forest industry, the magazine's new list shows that 2000 was a relatively quiet year on the consolidation front. According to research carried out by Vancouver forest industry consultant R E Taylor & Associates Ltd, most Canadian producers showed little change from their 1999 ranking. Compared to previous surveys, the year 2000 was anticlimactic-it became a year of belt tightening and concentrating on core businesses rather than expansions.

The only major transaction occurred early in 2000 when Quebec based AbitibiConsolidated acquired Donohue, which vaulted the company into the number three position. Declining lumber prices throughout 2000 resulted in survival tactics for most companies as they battled the first real downturn in prices (but not consumption) since the early 1990s. However, nine Canadian companies can now boast lumber output of more than one billion board feet in 2000. Canfor's SPF lumber production totalled more than 2.25 billion board feet at its 11 BC and two Alberta mills. But in the number two position, and very close behind, was Weyerhaeuser Canada with an estimated 2.2 billion board feet. Weyerhaeuser's 12 SPF mills (including three in Ontario) alone totalled a whopping 1.44 billion board feet.

The balance of Weyerhaeuser's Canadian lumber production is in coastal operations in BC. AbitibiConsolidated now has mills stretching from BC to Quebec with its takeover of Donohue and came in at number three with an estimated 1.92 billion board feet following a stormy year in the management ranks. West Fraser Timber takes the number four spot with 1.68 billion board feet from its 13 Canadian mills (including its share of production from its three joint ownership mills). West Fraser's acquisition of Plum Creek Timber's two sawmills in Louisiana and Arkansas (not included in their Canadian production totals) provided the only other major Canadian acquisition in 2000. The Slocan Group maintained its hold on fifth spot with 1.385 billion board feet as it hunkered down for the year.

Both Slocan and West Fraser are touted as the two lowest cost SPF producers in BC. As in 1998 and 1999, three strong Eastern Canadian companies continue to hold the next three consecutive positions. Tembec's 1.32 billion board feet of production from its 16 mills (including two in BC) held the company's number six ranking. Privately held Buchanan Lumber was ranked at number seven with an estimated 1.1 billion board feet from its seven Ontario mills and was followed closely by Domtar at number eight with 1.078 billion board feet from its 13 mills in Ontario and Quebec. Rounding out the top 10 is Weldwood (now a division of International Paper) at number nine with 1.007 billion board feet at seven mills (including its three joint venture mills). Number ten spot goes to another private company, Tolko Industries, with 903 million board feet from operations in BC, Alberta and Manitoba. The top 30 lumber producers accounted for 22.6 billion board feet, or 81.5 per cent of Canada's total production of approximately 27.7 billion board feet in 2000.

From the experience of 2000, what we now know is that supply side dynamics- including improved yields and faster throughput from technology, expanded processing of smaller logs, reduced log and lumber exports and increasing volumes of lumber imports-have all contributed to soaring capacity levels and overproduction at an astonishing rate. The outlook for 2001 will be further influenced by the culmination of excess supply, slowing consumption and the expected termination of the SLA, while the prospects for 2002 should eventually result in some improvements. When the final numbers are in, North American lumber production will have dropped in 2000 by about two billion board billion board feet to 63.6 billion board feet- with Canadian mills accounting for 1.2 billion board feet of this drop.

For 2001, lumber output is forecast to move lower by another one billion board feet to 62.6 billion board feet, and US mills will take the brunt of this drop (a 750 million board feet reduction). Both producing regions are expected to be stable in 2002 when production levels are forecast to improve by 150 million board feet to 62.7 billion board feet. Canadian lumber exports to the US peaked at 18.24 billion board feet in 1999 and are expected to decline through 2001 to 17.8 billion board feet in response to lower demand. Uncertainties related to the expiry of the SLA will compound the outcome of what the final export volumes will be and from what Canadian producing regions they will come.

There is little good news to influence lumber prices in 2001. If excess lumber production can be managed through planned curtailments and/or closures of uneconomical capacity-as finally started happening in the fourth quarter of 2000-then the second half of 2001 might be salvaged. However, the prospects of a bloodbath for the first six to seven months of 2001-tied to the expected expiry of the SLA-remain very high. Consequently, prices for the benchmark WSPF 2x4 random length lumber are expected to average US$225 per thousand board feet for 2001 (including the likelihood of a countervailing duty built into this price) as compared to US$259 per thousand board feet for 2000. The bottom line: a very poor year for softwood lumber producers is expected in 2001.

OSB The next OSB wave has just started and already the reality of too much capacity relative to demand has taken place. This trend is expected to impact plywood even further over the next four years as more OSB plants start up. Aside from economic drivers, the major factor that will influence structural panel prices will be the rate of construction of new OSB plants in North America (and, to a lesser degree, offshore plants). In 2000, four new plants were installed and two expansions occurred, representing an additional capacity of over 2.5 billion square feet.

For the period 2001 to 2004, another four billion square feet of new capacity is planned at 10 sites in North America-over and above the 500 million square feet per year of "capacitycreep" at existing plants. Of the additional 10 plants proposed, half of them are in formal stages of planning, indicating that at least nine new plants and two capacity additions will likely be built over the entire period between 2000 to 2004. Looking ahead, over the next three to five years the demand for OSB is heavily tied to housing starts and these are not expected to reach the levels of 1999 or 2000 (over 1.6 million US starts) until 2004 at the very earliest. As a result, structural panel demand is expected to slip from the 39 billion square feet level achieved in both 1999 and 2000 before rebounding as early as 2003 to finally exceed 40 billion square feet.

The next four-year period (between 2001 and 2004) looks extremely questionable for OSB. Too much planned capacity is chasing a demand scenario that is expected to show little growth. Our forecast assumes fewer OSB mills will be built than currently planned and operating rates should hover between 85 per cent and 90 per cent between 2001 and 2005-well below those levels achieved in the 1997 to 2000 period.

The plywood outlook is based on declining production due to reduced demand and, more importantly, substitution from OSB. Sheathing plywood will be under price pressure from lower cost OSB resulting in substantial declines in output and plywood mill closures. These reductions will be heaviest in the US South, as output is forecast to decline by almost two billion square feet from 2000 to 2005. Canadian plywood is expected to be under less pressure by comparison. The supply and demand outlook for structural panels points to soft prices due to slower consumption and the prospects of excess production in the next two years.

Improving prices are not expected to occur until 2003 when the supply and demand balance starts to improve and North American consumption levels rise again. As a result of these two main factors, our price forecast calls for OSB (using US North Central as the base product) to average around US$150 per thousand square feet for the next two years-well below 1999's average of US$260 per thousand square feet. Unlike the last six years, the next four years will need some careful strategic thinking to avoid an all out bloodbath in OSB.

The premise of lower prices and more aggressive competition both inside and outside North America will still create a cloud over the OSB sector in the next few years. Russell E Taylor is president of R E Taylor & Associates Ltd - Forest Industry Strategic Services, and Publisher of the WOOD Markets Monthly newsletter and WOOD Markets 2000 - The Five-Year Solid Wood Markets Outlook (Phone: 604-801-5996; email: [email protected])

The demand for lumber and OSB is heavily tied to US housing starts that are not expected to reach the levels experienced in 2000-over 1.6 million housing starts until 2004 at the very earliest.

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