outlook for the north american lumber industry · softwood lumber poised for an historic period of...

© Copyright 2018 RISI, Inc. | Proprietary Information

Outlook for the North American Lumber Industry

Dustin JalbertSenior Economist, Wood Products

North American Conference October 2018

2© Copyright 2018 RISI, Inc. | Proprietary Information

Agenda

• Review of current market conditions• North American softwood lumber demand US housing driving growth in North America Offshore markets remain a drag on demand

• North American softwood lumber supply Availability of timber driving investment trends US South set for an historical capacity expansion period

• Outlook for costs and profitability Tight market conditions will persist

Supply Shocks and Strengthening Demand Send Prices Soaring

Current Market Conditions


Prices Reached Record Highs in the Spring, But Now Coming Back to EarthCrow’s Weekly Market Report, Monthly Average, US Dollars per MBF

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Jan‐16 Apr‐16 Jul‐16 Oct‐16 Jan‐17 Apr‐17 Jul‐17 Oct‐17 Jan‐18 Apr‐18 Jul‐18

Crow's Composite

SPF 2x4

© Copyright 2018 RISI, Inc. | Proprietary Information 4

How did we get here?

1. Countervailing and anti‐dumping duty Preliminary set in April, finalized in December

2. Historic wildfire season in 2017 Reduced sawlog availability, lumber dealer

inventories plummeted

3. Shipping challenges from Western Canada Captive producer inventory in Canada during peak

buying season

4. Strong fundamental demand in US housing Growing slowly and steadily Supply struggling to keep up


100

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US Dollars per M

BF

No Duty (2017)

Duty

Delivered Cost

Duties Move Canadian Producers Further Up the Softwood Lumber Cost CurveNorth American Softwood Lumber Average Variable Cost Delivered to Chicago*

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US Dollars per M

BF

20% Duty (2017)

* Adjusted for product mix and underweights


Delayed Shipments from Canada Expand InventoriesCanadian Softwood Lumber Production, Shipments and Stocks (MMBF)


Source: StatsCan, RISI

1,000

1,500

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Jan‐12 Jul‐12 Jan‐13 Jul‐13 Jan‐14 Jul‐14 Jan‐15 Jul‐15 Jan‐16 Jul‐16 Jan‐17 Jul‐17 Jan‐18

Production Shipments

Stocks Average Stock Levels

700‐800 MMBF in excess producer inventory!

Dealer Inventories Have Cratered Since Early 2017US Softwood Lumber Inventory Estimate, Months of Supply

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0.7

0.9

1.1

1.3

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1.9

2.1

Jan‐13 Jul‐13 Jan‐14 Jul‐14 Jan‐15 Jul‐15 Jan‐16 Jul‐16 Jan‐17 Jul‐17 Jan‐18 Jul‐18


Retroactive duty back to February

Canadian Shipments to USA Affected by Both Imposed Duties and Rail ChaosUS Imports (BBF) and Canadian Dollar (Right‐Hand Scale)


*Annualized YTD thru June

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CanadaOffshore ImportsCAD/USD


Updates on the Trade Front

• No real movement on Canadian/US dispute Preliminary duties set in April 2017, finalized in December

Canada appealing to WTO and NAFTA panel

• Movement on NAFTA agreement raises odds of lumber agreement? Trade tensions cool with Europe, but China negotiations remains priority

• New front emerges for lumber producers with China trade dispute Tariffs on softwood lumber by both parties implemented in September

5‐10% tariffs on most US softwood lumber exports to China; 10% tariff on Chinese softwood lumber imports to USA

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SYP Most Exposed to Tariffs on US ExportsUS Reported Softwood Lumber Exports to China (MMBF), SYP & Treated Share of Exports (Right Axis)


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SYP Treated Other SYP & Treated Share (R)

Growth in US Housing Compensating for Canadian and Offshore Headwinds

North American Demand


US Softwood Lumber Consumption: R&R Remains the Largest End‐Use Market for LumberMarket Share and Volume BBF


15.030%

10.321%

22.045%

1.94%

2017: 49.2 BBF

Residential Industrial R&R Nonresidential

18.934%

10.419%

24.343%

2.24%

2020: 55.8 BBF

13

US Domestic Demand Growth More Than Offsets Decline in Net Exports And CanadaDemand on North American Mills, BBF

‐100

102030405060708090

BBF

US Canadian Net Exports

3.5%


5.7% 0.9% 3.1% 2.6%

Net Exports Fall as Domestic Markets Improve and Competition Offshore IncreasesNorth American Net Exports and Share of Demand on Mills, BBF

‐2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

‐1

0

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BBF

Net Exports

Percent of Demand on North American Mills (R)


A Wave of Southern Sawmill Investments Drives the North American Capacity Outlook

North American Supply


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Eastern Canada

Total HarvestOperable SustainableAllowable Annual Cut

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British Columbia

BC Runs Up Against Fiber Constraints, While Eastern Canada Seems to Have Room to ExpandRoundwood Harvest Demand, Million Cubic Meters, All Species


US West Coast Log Cost Premium Drives Investment to the US SouthUS Delivered Log Prices (MBF, Scribner)

0%15%30%45%60%75%90%105%120%135%150%

0100200300400500600700800900

1,000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*

Douglas‐fir (West Coast)Southern Yellow PineDouglas‐fir Premium (%)


*Forecast for 2018.

US South Will Continue to Be the Low‐Cost Region over the Forecast HorizonAverage Variable Production Costs, US Dollars per MBF

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1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 1Q18 1Q20

US South US Coast US Inland



Softwood Lumber Poised for an Historic Period of Expansion in US South• Fast facts on US South sawmill projects 3.5 BBF announced to startup in 2018 and 2019 16 new sawmills announced, many more incremental

expansions Average capital outlay of $114 million per greenfield

sawmill investment Average capital cost of ~$420 per MBF invested

• Contractor lead times and labor shortages will likely push projects into 2020 or even 2021

• We assume ~2.3 BBF of announced capacity makes it to market by 2020

Modest Top‐Line Supply Growth Masks Divergent Regional Trends


Capacity Outlook Summary, 2018‐2020

Region 2005 (BBF)2017 (BBF)

2020 (BBF)

Change (BBF) CAGR

Canada 38.7 30.9 30.5 ‐0.4 ‐0.4%

British Columbia 18.6 14.9 13.6 ‐1.3 ‐2.7%

Eastern Canada 20.1 16.0 16.9 0.9 1.6%

United States 43.3 40.4 44.3 3.9 3.0%

US South 19.4 21.2 24.3 3.1 4.4%

Other USA 23.9 19.2 20.0 0.8 1.3%

Total North America 82.0 71.4 74.8 3.4 1.5%

Outlook for Lumber Prices


Markets Will Continue to Tighten and Remain Volatile

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1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

North American Softwood Lumber Market Expected to Further Tighten Demand/Capacity Ratio for North American Softwood Lumber


Lumber Prices More Volatile and Prices Trend Higher as Demand/Capacity Reaches Mid‐80sScatter Plot of WF2x4 Price/AVC and Demand/Capacity Ratio

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Price/AV

C

Demand/Capacity


Take Home Points• US domestic consumption will continue to grow, while Canadian demand finally cools

• Increased competition, new Chinese tariffs and strong domestic pricing environment will:− Moderate growth in offshore shipments− Pull in more imports from offshore

• Duties and rail delays have cost Canadian producers market share− Canadian producers have been pushed further up the industry cost curve

• Despite historical capacity expansion US South, markets expected to tighten, keeping upward pressure on pricing and profitability− Some upside risk to capacity outlook could alter operating rate outlook


Thank you for your attention!For more information:

North American Lumber 5‐ and 15‐Year Forecastswww.risi.com/lumber5yearwww.risi.com/lumber15year

Lumber Commentarywww.risi.com/lumbercommentary

Dustin Jalbert, [email protected]


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