North America’s forest product industry faces numerous challenges
From the Tree Tops
These are confusing times for the forest product industry. The lumber industry is facing supply issues from Pacific wild fires, mill issues from Irma, worker shortages, an uncertain U.S. housing market and a dispute between the U.S. and Canada. But prices are rising, in spite of the uncertainty. In the infamous softwood lumber dispute between the United States and Canada, the U.S. Department of Commerce announced in late August that countervailing and anti-dumping duty cases against Canadian lumber imports has been postponed until no later than November 14. The final determinations had been scheduled for September 6th.
During the announcement, U.S. Secretary of Commerce Wilbur Ross said, “I remain hopeful that we can reach a negotiated solution that satisfies the concerns of all parties… This extension could provide the time needed to address the complex issues at hand and to reach an equitable and durable suspension agreement.”
The Trump Administration had imposed a 20% tariff on Canadian softwood lumber with specific duties on five Canadian lumber firms ranging from three to 24%. Canada accounts for 96% of the U.S. softwood lumber imports, although the share is falling.
With the postponement, the preliminary CVD (countervailing) is no longer being assessed [as of August 25]. The postponement of the final determination means that the gap period when the CVD is not collected will now extend for around four months. However, the preliminary AD duty is still in place regarding Canadian lumber shipments to the U.S.
Nothing Happens in a Vacuum
Although the U.S.-Canada lumber dispute has pitted U.S producers against their Canadian counterparts, from industry perspective, the U.S. (particularly the South) looks ripe for the picking. Approximately, 40% of the South’s softwood lumber production is in mid-sized regional sawmill companies, and these are targets for larger producers.
In July, Canadian lumber producer, West Fraser, announced an agreement to acquire Gilman Companies, a major producer of southern yellow pine lumber with six sawmills in South Georgia and North Florida comprising 700 million board feet (MMBF) of capacity. The Gilman acquisition is part consolidation movement of softwood sawmills by Canadian lumber producers in the U.S. South. The deal will allow West Fraser to overtake Weyerhaeuser as the largest lumber producer in the region. The total capacity for operating softwood lumber mills in the South is around 19.7 billion board/feet. West Fraser owns 15 southern mills with total capacity of 2.4 billion b/f, accounting for 12% of the region’s total capacity. With the purchase West Fraser will control 3.1 billion b/f, around 16% of the region’s sawmill production capacity.
There are many permutations to the dispute on both sides of the border, as forest product companies line up in their respective positions and lobby for their governments for support – defacto tying the hands of negotiators.
A little over a week ago, Canada’s ambassador to the U.S. David MacNaughton, in an effort to break the gridlock, suggested Canada is prepared to pursue a permanent settlement in softwood lumber within the NAFTA (North American Free Trade Agreement) framework. This would effectively by an end-around take U.S. lumber producers out of the negotiations. Of course, the issue remains whether NAFTA itself can be re-negotiated.
One of the reasons that the U.S.-Canada softwood lumber dispute happened at all is international in nature: after a nice run of Canadian exports to China, the market softened and at nearly the same moment a U.S. housing rebound bumped up demand. U.S. producers took umbrage to lower priced Canadian lumber and the seeds of the dispute were sown.
With the duties placed on Canadian import, other sources of lumber have come out of the woodwork, including Putin’s Russia. U.S. imports of softwood from Russia are up 42% for 2017.
Russia is not alone in taking advantage of the dustup, as Germany and Austria have increased supplies to the US with German softwood imports up over 900%, Austrian softwood exports a staggering 178%, Romania’s 141%, and Sweden 41% for the first half of 2017.
Housing Sales and Hurricanes
The hurricane season is pushing lumber prices upward in a way that the housing market couldn’t. The Cumming, an international real estate and construction consulting firm, wrote in their market analysis, “The market was anticipating a decline in lumber prices nationally; however, the impact of the hurricanes will most likely nullify the decline. Since the hurricane, panic buying and speculation has driven up costs for dimensional lumber, plywood, and oriented strand board.”
At this writing, there have been six Atlantic hurricanes pushing lumber futures on the CME up 20%. After Hurricane Harvey, prices hit $396.40 per 1,000 b/f. On September 8th , lumber futures on the CME (Chicago Mercantile Exchange), for September delivery touched $402.80 per 1,000 b/f, nearly the highest in a decade.
In the case of Irma, it’s unknown how many houses will need to be rebuilt driving up demand for building materials. Ports indicate 25% of the houses in the Florida Keys were destroyed by Irma but determining the total from the hurricane may be months off though the demand for some products like sheathing may rise 50% as the rebuild gains momentum.
But the hurricanes have also depressed the market. U.S. home resales fell to their lowest in a year in August as Hurricane Harvey depressed activity in Houston according to the National Association of Realtors (NAR). Existing home sales decreased 1.7% to a seasonally adjusted annual rate of 5.35 million units last month-the lowest level since August 2016.