The bullish hopes for a stronger recovery in B.C.’s lumber sector in 2015 ran smack into a more bearish first-quarter market, with a lot of U.S. shipments frozen out by harsh winter conditions and a slowdown in the China construction market.
The results aren’t so clear in statistics on B.C. lumber shipments. But the scramble to redirect sales from an oversupplied Chinese market to the stagnant U.S. saw prices collapse low enough to trigger export taxes under the Canada U.S. Softwood Lumber Agreement in April for the first time in almost two years.
“This is not the forestry recovery that was hoped for,” said economist Bryan Yu in his latest B.C. Economic Briefing for Central 1 Credit Union.
Despite a rise in U.S. homebuilding and better economic growth generally across the border, Yu wrote that “B.C. lumber production remains in a disappointing holding pattern,” with month-by-month production from B.C. mills “trundling along at a pace that is not all that different from the average level observed since 2012.”
The slowdown in shipments to China started taking hold at the end of 2014, said Russ Taylor, industry analyst and publisher of the newsletter International Wood Markets.
“I was (in China) for two weeks at the end of January and I saw the market crumbling around me every day,” Taylor said. “Everyone was oversupplied in China.”
Producers were trying to shift sales into the U.S. just as the eastern seaboard and Midwest were being hit by brutal winter weather that slowed building activity, Taylor said.
Taylor cautioned that the supply-demand hiccup in the market isn’t evident in trade statistics.
B.C.’s lumber exports for the first four months of 2015, at 8.4 million cubic metres, are 13-per-cent higher than the same period in 2014, but Taylor said that is only because of the 28-day Port Metro Vancouver trucking strike in March that virtually halted shipments at a time of high demand.
Current lumber prices tell more of the story. The key commodity price for 1,000 board feet of western spruce, pine or fir 2X4s fell from a high of US$324 at the start of the year to a low of $253 at the end of April.
Prices have rebounded since to $300 per 1,000 board feet at the end of June, but Taylor characterized the decline as “the greatest three-month decline since 1995.”
“It was just a function of way too much supply all of a sudden, and very little demand,” Taylor said, and the price fell through the threshold that triggers export taxes.
That ate into first-quarter profits of the major forestry firms, but the sector as a whole isn’t panicking just yet because the longer-term trends for lumber demand remain positive, said Doug Routlege, vice-president of the industry group Council of Forest Industries.
Some companies have resorted to brief shutdowns to curtail the output of their own operations in the face of weak conditions.
Tolko Industries Ltd. closed its Quesnel sawmill for a week at the beginning of May due to low prices and poor log supplies, the company said in a statement. At the end of June, Conifex Timber Inc. said it will take two weeks of downtime at its Fort St. James operation, citing market conditions and the export tax, which rose to 15 per cent as of July 1.
Routledge said decisions on curtailments will likely happen on a case-by-case basis driven by the individual considerations of companies, and he doesn’t expect more of an industry-wide response.
“I think B.C. companies have positioned themselves reasonably well to weather a longer, more protracted recovery both in China and North America,” Routledge said.
On that front, Routledge said the Chinese market, which “saved our bacon during the core of the (recession),” has cooled considerably due to a slowdown in demand and to inroads that Russian and New Zealand producers have made into the market.
Taylor said the market in China for wood for furniture and cabinetry is the one bright spot, but that is no help to Canadian lumber or log producers. The U.S. is a big beneficiary of that market — its hardwood log producers have seen exports to China soar 55 per cent so far in 2015 compared with the same period a year ago.
However, Routledge said the B.C. industry continues to see positive signs in improving construction and building-permit statistics from the U.S. and increasing pickup for the use of lumber in engineered wood products for larger commercial building.
And while sales are slow to China now, Routledge said B.C. firms maintain the strong relationships they forged in the market during the recession, which the industry expects will continue to pay off.
“These are all trending in the right direction,” Routledge said, “but it’s not a steep recovery.”
Another bright side in the market is that there is an increasing amount of flexibility in the U.S. supply chain, said Keta Kosman, publisher of the industry newsletter Madison’s Lumber Reporter. Both wholesalers and large building firms are carrying larger inventories of lumber and aren’t all buying directly from mills, which means more stability in pricing.
“It looks like China will continue on with very similar volumes as they did last year and the year before,” Kosman said. “The fact (shipments) aren’t going down is good enough for us right now,” she added. For growth, however, “everybody is looking at the U.S. through this year and next.”