In Wood Markets’ new five-year softwood lumber forecast, the continuation of U.S. duties on Canadian lumber exports to the U.S. is expected to cause more short-term market and price volatility. The preliminary duties launched earlier in 2017 rocked the U.S. market and more of the same is expected in 2018. The Wood Markets outlook report predicts more chaos and the chance of further record-breaking prices in North America, while global lumber supply tightens and exports grow.

An analysis of commodity lumber and structural panels was released earlier this week in the report, WOOD MARKETS 2018 – The Solid Wood Products Outlook: 2018 to 2022 by Wood Markets/FEA Canada.

The recent announcement of final countervailing (CVD) and anti-dumping (ADD) duties on Canadian lumber exports to the U.S. will cause lumber prices to remain near record levels in 2018 and even higher at various points over the next five years, the group predicts. This is because Canadian lumber production and Canadian exports to the U.S. are forecast to ease in 2018.

“Simply put,” said Russ Taylor, managing director, Wood Markets/FEA Canada, “by restricting incremental Canadian lumber exports via import duties, there may not be enough lumber supplies to adequately balance with projected U.S. demand. There will need to be major increases in U.S. lumber capacity (which is starting to build), more offshore imports, and/or record-level prices to stimulate more supply. The question that we have seen coming for a number of years is: Where will the U.S. get all of the lumber it needs, and at what price?”

The impact of U.S. import duties on Canadian lumber production and exports has been developed from building a cost curve of Canadian producing regions from Wood Markets’ Global Timber/Sawmill/Lumber Cost Benchmarking Report. From this, Wood Markets has overlaid a cross-Canada timber supply availability map with delivered log and sawmill costs to determine which producing regions (and mills) are most impacted by 20.23 per cent (“all-others”) import duties.

While the timing of supply and demand forces is always unpredictable, the group forecasts that the first real “supply gap” could occur as early as 2019. This is when there may not be enough incremental lumber supplies that are readily available to meet overall projected U.S. demand, without seeing an increase (versus the forecast decrease) in Canadian lumber imports.

“What this all could mean,” said Taylor, “is that ongoing price volatility can be expected again in 2018, and even more so in 2019 and/or 2020, when further record-level lumber prices are forecast in the U.S. market.”

Some of the regional trends are summarized here:

  • As the import duties on Canadian lumber imports will give many U.S. mills a substantial cost advantage, a surge of capacity expansions has already started and more are expected. This should allow American mills to increase their market share of its home market.
  • From near 34 billion bf in 2017, total U.S. output is forecast to increase by around 10 billion bf by 2022, depending on the mill capacity increases in the U.S. This forecast production surge is considered to be a very aggressive and will be difficult to achieve, but it is considered possible given the improved competitive advantage of U.S. mills as lumber prices rise.
  • Canadian lumber production is expected to dip slightly in 2018 and potentially in 2019 from the impact of U.S. import duties and tight timber supplies. Exports to China are forecast to increase slightly, but this will depend on lumber price levels as compared to the U.S. price, net of import duties.
  • The B.C. Interior timber harvest will drop as import duties marginalize some sawmills, as well as from the impact of lower output from uneconomic mountain pine beetle-killed timber.
  • As a higher cost region in Canada, Eastern Canadian mills could have difficulties, at times, to absorb import duties when lumber prices soften. However, is it expected that by 2020 (and maybe sooner), more exports will be required to fill the expected U.S. “supply gap”.

European structural softwood lumber imports are forecast to ramp up dramatically to take advantage of the pending supply gap, that should keep lumber prices at high levels. The magnitude of European softwood lumber exports to the U.S. is difficult to predict, but higher prices will attract more volumes to the U.S.