In July of 2014 the exchange rates between the United States and Canada started to slip. It moved from parity to $1 USD vs. more than $1.30 CAD. This indicates for every dollar the Canadian lumber producer’s ship into the United States they receive more than $1.30 back.
The exchange rates between China and Russia came into play as well. China’s economy is slowing… Their stock market crashed hard but it also isn’t representative to the population so you have to take that with a grain of salt. The lumber they consume is also typically lower grades as well but it is still mill production.
It is easiest to look at it in China’s perspective the same way we look at US consumption from the US perspective. Currently, for every dollar China spends on Canadian lumber they get $.21 worth of product. For every dollar China spends on Russian lumber they get $9.87 worth of product. Clearly they currently are getting better value buying from Russia if they can deal with all the reported logistics issues.
The market proved in economic terms “inefficient” meaning it didn’t correct very fast. The slide in commodity pricing really didn’t take place until the first quarter of 2015. Technically it was the largest first quarter price drop recorded in Random Length’s history.
The following graph depicts the futures pricing. It shows what happened after we established most pricing in April. Essentially we rode the lumber market up and subsequently back down to about the same point with little impact on customer pricing.
The Softwood Lumber Agreement
The slide on pricing in the first quarter triggered the Softwood Lumber Agreement (SLA) trade restrictions which placed a tariff on the Canadian Exports. Essentially the tariffs were largely responsible for the bump in pricing that peaked towards the end of June. They were also responsible for the bump that started in October. The SLA expired this fall. There have been rumors it may be re-instated but as of now nothing has materialized. Contributing to the debate is the fact that Northern mills such as West Fraser, Canfor, and Weyerhaeuser all are acquiring Southern Yellow Pine mills in a process known as “consolidation.” Essentially this means they are “playing both sides of the fence” and aren’t as interested in a tariff any longer.
One more issue on the lumber side that really hasn’t received much attention yet is how the lumber futures are traded on the Chicago Mercantile Exchange (CME). The CME moved to an all-electronic format and closed the pit trading this summer which has reportedly changed the “feel” of how the futures trade. There are also talks of eliminating after hours trading as well.
The dynamics haven’t really been evaluated critically yet but watching the futures trade it appears any industry news tends to create a lot of “panic” transactions which move the market rapidly. Investment funds that have to maintain a specific percentage of their portfolio in lumber also tend to move the market substantially. At this point I’m not expecting any real changes.
Freight continues to be one of those intangibles and doesn’t seem to go down. Fuel costs are currently low, but increased regulations on trucking in the United States and the draw of more lucrative contracts keeps many truckers from wanting to delivering lumber. Canadian mills have reported higher freight rates and shortages of trucks almost all year and tend to blame the shortage on lack of drivers that want to cross the border into the United States. Other times truckers shift their services to hauling for other industries such as produce and currently I’m hearing “Christmas trees.” Regardless of the reasons, it is apparent the trucking industry is going to go where they get the most lucrative returns.
Wood Markets Monthly
“Wood Markets Monthly International Report” is a publication that provides information on sawmill global results, sawmill global earnings, the global cost of logs, the global sawmill costs, lumber revenues, and the U.S. Markets Competitiveness. In their October edition they suggest competitive pricing as a result of Exchange rates and currency valuations for wood coming from Canada and southern US mills. Western U.S. mills will suffer from a lack of substitutable products (they can’t import cheap logs or mill material any cheaper than a Canadian mill). Overall though, they suggest “Lower lumber prices are expected in 2016” and suggest prices may “fail to see the levels of 2013 and 2014 until demand moves to much higher levels – perhaps 2017”.
With all this being said, a Look back at the futures chart shows we have already came back up above the annual lows (where we set pricing last year). At $220/m mills curtailed production and drove the market back up. My own personal feelings are that dimensional pricing levels are going to go too far one way or the other than the level they are now. There may be a few opportunities before spring yet but by March and April at these levels it is definitely a safer bet to expect a seasonal bump.
The panel market is a different story. Panel manufacturers really have ample production capacity if they chose to use it… pricing remained relatively low for most of 2015 until mills curtailed production.
Panel pricing is a function of many of the same criteria as lumber pricing; log costs, production costs, freight costs, exchange rates, and etc. The current spike is a reminder that when panel pricing is too low, any disruption in production will result in an increase in costs.
Freight issues to this point have prohibited bringing in material from different geographic regions. From the current exchange rate perspective production from Canada should be economical in the U.S. but the fact that the one clear substitute for Weyerhaeuser, the G.P. Englehart mill, took an extended curtailment made it a mute issue in our market.
As pricing bumps up slightly it will open up supply from other zones, currently manufacturers want to ship wood at market price but we are approaching the levels where North Central producers will hurt themselves going much higher. Overall OSB pricing was too low and freight was really problematic to get OSB from outside North Central. Crossing the border from Canada to the US again continues to be problematic.
With all this being said, G.P. announced they are starting to have wood available in December. This would suggest pricing will remain firm well into the first quarter but rise has appeared to have halted. With March and April needs right beyond that I wouldn’t look for the bottom to drop out of the OSB market right away and I would expect pricing around these levels.