north american lumber outlook - fastmarkets risi

North American Lumber OutlookIndustry resilience amidst unprecedented economic turmoil

2020 | Fastmarkets | North American Virtual Conference

Dustin Jalbert

Senior Economist, Wood Products

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Agenda

• Current market conditions & drivers of record price levels

• Impact of COVID-19 on demand through 2022

• Supply implications and challenges from offshore

• Outlook for industry profitability going forward

• Take home points and conclusions

2020 | Fastmarkets | North American Virtual Conference 2

Current market conditionsExtreme volatility in the wake of choppy demand

and aggressive sawmill curtailments


Lumber prices have soared to record highs, smashing the 2018 record over the summer

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AVC for high-cost region RL Framing Lumber Composite W. SPF 2b 2x4 W. SYP 2b 2x4

Random Lengths Weekly Report, monthly average, US dollars per MBF


US softwood lumber demand growth tepid since 2017, but was poised to accelerate into 2020 prior to COVID-19

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Apparent consumption Four-quarter moving average

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Quarterly US softwood lumber apparent consumption, BBF, annualized rate

2010-2016 avg: 5.9%


2017-2019 avg: 1.1%

Sawmill curtailments piled up in the spring

• Announced temporary curtailments totaled more than 1.3 BBF

from late March through early May

• Shift cuts and trimmed workweeks went under the radar

• Approximately 20-30% of the industry curtailed in April alone

Sawmill production data now seem to confirm this

North American SADJ production down 18% in April and 15% in May from February levels

• May restarts due to tighter market conditions, higher-than-expected demand

• Indefinite/permanent curtailments thus far

Klausner Live Oak, FL – bankruptcy

GP, DeQuincy, LA – indefinite curtailment

Canfor’s Isle Pierre, BC – permanent closure


DIY boom showing signs of cooling, but building and garden center sales were exceptionally strong through July

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Retail sales in Building Materials, Garden Equipment and Supplies Dealers Total retail sales (including food service)

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US retail sales, year-over-year percentage change


Google search results for “Build a…” spiked in April and May and remain elevated

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Deck Porch Fence Shed Garage

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Google Trends search results, 100 = highest search frequency

Note: Data pulled on 9/10/2020.


Housing data continue impressive rebound…starts in September look promising

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Single-family housing starts Multifamily housing starts NAHB HMI (R)

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Housing starts, single-family, SAAR, thousand units; NAHB HMI


Demand on mills has been much steadier than expected, and is now likely surging above recent seasonal norms

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North American demand on mills, BBF, monthly, NSA


March-June:

DOWN 2% to 5% YoY

July-September:

UP 2% to 4% YoY

October-December:

DOWN 1% to 2% YoY

Wood products output is still encumbered by the impact of COVID-19 despite restarted capacity

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Wood products employment, thousands, seasonally adjusted


WP employment still down

4.5% from February levels

Mill stocks have fallen as producers sold out of inventory through April and May

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US mill stocks Canadian mill stocks US avg (2014-2017) CA avg (2014-2017)

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North American softwood lumber mill inventories, BBF

Source: WWPA, Statscan, Fastmarkets RISI.


Channel inventories have likely been falling since 2017, and remain very lean

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US softwood lumber inventory estimate, months of supply

Source: WWPA, Fastmarkets RISI.


North American lumber demandDemand remains resilient in North America, and

will accelerate into 2022


Demand summary,

CAGR 2020-2022

• US consumption: 1.9%

• CA consumption: 0.5%

• Net exports: 0.8%

• Demand on mills: 1.5%


Demand on mills will fall 700 MMBF in 2020, but return to growth and hit 60 BBF by 2022

0.7%-3.0%

-1.1% 1.7%4.0%

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US Canadian Net exports

27%35% 34%

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43% 43%

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R&R Single-family Multifamily Mobile Industrial Nonresidential

Residential construction will continue to drive lumber demand going forward

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US lumber consumption by end use, BBF


US lumber exports will likely rebound as the global economy reaccelerates, but competition offshore will remain fierce

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SYP Treated Other SYP & treated share (R)

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Total US softwood lumber exports (BBF), SYP and treated share of exports (right axis)


Canadian offshore exports will remain subdued going forward with reduced export capacity and stiff competition

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Canadian offshore softwood lumber exports (BBF), monthly


Source: COFI, Fastmarkets RISI.

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China Japan Other offshore China share (R)

North American supplyRecord prices and subdued wood costs will keep mill

closures minimal for the time being


Duty relief coming in November, but Canadian mills still relatively high cost in key markets

Key points

• DOC announced

Canadian duties will drop

from combined 20% to 8%

in November

• Relief in BC as stumpage

rates adjust from elevated

levels in 2019

• US South, still the lowest-

cost supplier, continues to

dominate the market

• European supply is VERY

competitive in the Gulf and

Atlantic Coast regions


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Average variable costs Freight Duty

North American softwood lumber delivered variable costs,¹ delivered to Dallas-Fort Worth,

third quarter 2020 estimate

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1. Adjusted for product mix and underweights.

European lumber exports to the US have increased six-fold since 2014! And the volume will continue to rise

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US offshore imports by supplying region, BBF

Capacity outlook: Growth in US South tempered by losses in British Columbia

US South + 2.4 BBF

US West Coast + 0.2

US Inland + 0.1

Other US + 0.1

British Columbia - 0.8

Rest of Canada + 0.5

North America + 2.4 BBF

Substitution effect

Income effect

Supply outlook, 2019-2022


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Southern lumber share of US consumption (R) US South lumber production All-time high (2Q06)

Substitution to SYP will continue going forward as SPF becomes less available and demand grows

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US South lumber production (BBF, quarterly); US South share of US consumption (right axis)


How will 2020 wildfire season impact supply picture?

Substitution effect

Income effect


Wildfire impact

Mill type

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Profitability outlookSawmill margins set to correct after record shattering year


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D/C ratio Downtime adjusted D/C ratio¹

North American operating rates expected to drop into 2020 and rebound modestly through 2022

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Demand/capacity ratio for North American softwood lumber


1. Adjusted for Fastmarkets RISI’s estimated and assumed downtime through September 2020.

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KD Douglas-fir 2x4/AVC SYP (West) 2x4/AVC

Cash margins will remain elevated for SYP, keeping sawmill investment in the US South extremely attractive

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SYP and Douglas-fir 2&B 2x4 price divided by average variable costs


Take home points

• Markets are out of equilibrium, but a correction is underway as

demand slows seasonally and COVID supply impact subsides

• US and Canadian domestic consumption will be flat in 2020 as

residential investment remains resilient, and rebound from 2021 forward

• Net exports will remain pressured by weak demand offshore and European

imports further penetrating the East and Gulf Coasts

• Capacity in North America will grow 2.4 BBF through 2022, driven by the US South,

while sawmill capacity investment is restrained in BC and the Pacific Northwest

• Operating rates will average 81% in 2020, but will ascend to 84% by 2022 as demand

recovers, supply additions restrained outside of US South

• Risks include resurgence in COVID-19 that drives further shutdowns in 4Q20 and

1Q21; upside risk if recession impact remains contained to retail and food service;

Oregon wildfires a wildcard to supply


Thank you for your attention!

Lumber Commentary

www.risi.com/lumbercommentary

North American Lumber Forecast, 5- and 15-year

www.risi.com/lumber5year

www.risi.com/lumber15year

Outlook for US Offshore Lumber Imports

www.risi.com/US_lumber_imports

Dustin Jalbert, [email protected]

For more information:


http://www.risi.com/lumbercommentary

http://www.risi.com/lumber5year

http://www.risi.com/lumber15year

http://www.risi.com/US_lumber_imports

north american lumber outlook - fastmarkets risi

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