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Market Update: Lost Infrastructure Brings Growing Pains to Forest Products Industry
Market columnist, Jeff McBee, talks about the lost infrastructure in the forest products industry and its impact on domestic lumber markets. His analysts suggests the problems are only going to get worse if the new home construction market truly heats up.
By Jeff McBee
Date Posted: 5/1/2013
In 2008, the economy began to lose steam in March, tilted downward in June and hit the fan in October. When the housing market disappeared nearly overnight the economy collapsed, all sectors of the forest products industry scaled back in self-defense.
The housing market’s demise created a plunge in activity and subsequently pricing throughout all sectors of the forest products industry. The impact was fully felt in both softwood and hardwood markets throughout North America.
The reaction by the forest products industry in both hardwood and softwood markets was very similar. Since activity in the grade markets had faltered, leading to weak pricing for upper grade material, sawmills leaned heavily upon industrial wood products. It was predictable that mills would face profitability issues.
Production curtailments ensued. Some mills suspended operations altogether.
There were too many mills focusing on industrial applications. Despite limited production levels, it didn’t take long for production to outpace the solid but not spectacular demand from industrial sectors. Predictably, prices for industrial offerings lost ground. More curtailments and closures followed.
Sawmill production reached levels lower than the industry had seen in years.
Today the housing market is still far from where it needs to be for the sake of the economy in general and the forest products industry in particular. A full recovery for the forest products industry has to involve a healthy housing market.
Few people expected the economic trough to last as long as it has. It has been a long five years.
Now that the housing market is beginning to awaken, where are we now as an industry? Recent modest upturns in demand in the forest products industry have revealed that during that downtime, the industry has lost quite a bit of infrastructure.
During that long five years, the forest products industry lost people and production at every level. The industry lost loggers. There were sawmills that closed permanently. There were some that suspended operations, but have been gone so long now that they may not be back. Along with the lost sawmills, the industry lost a lot of skilled workers. The combined losses make even modest growth difficult.
The lost infrastructure has now left the forest products industry in the middle of a fiber crunch that is impacting all levels of the industry.
The price run up in the softwood market over the past four months has been nothing short of meteoric. Upper grade prices have registered staggering gains. The industrial side of the softwood market was taken along for the ride. Despite soaring softwood prices, the gap between #2 softwood and economy material grew to record levels. The size of the gap was – in the sellers’ minds – evidence that industrial softwood pricing was lagging behind the rest of the market.
As of our press time, that price gap has begun to close. The gap drew down to a normal size and then shrank to a smaller than traditional gap. Is this a sign that the historic price run-up is near the peak?
Despite some signs that the market may be nearing a plateau, there are other factors that point toward more strength on the industrial side.
Some of the signs of cracks in the market included a bearish tone in lumber futures on contracts for July going forward. The news gave traders in the grade market some pause.
The softwood shortage in the industrial side of the market has contributed to record runs in price, but price isn’t always the biggest problem. Sometimes it is availability. Finding enough material has been challenging for softwood pallet lumber buyers.
Softwood mills have upped their production levels but have been unwilling or – in most cases – unable to bring on additional shifts. The extra production helps industrial softwood supply levels, but offshore demand has kept industrial softwood supplies and pricing challenging.
Offshore markets have been a large part of the problem. As the grade market climbed, prices in North America hit levels that were unappealing to Asian markets. Offshore lumber buyers shifted their lumber target to Utility, #3 and Economy grade material. The result has been skyrocketing prices for pallet material in any form.
The result is quite a bit of upward price pressure at all levels of the softwood market.
The industrial hardwood market was not without its own challenges east of the Rockies. Even the softwood market began to have an impact.
Weather has provided more than the expected late winter challenges as winter weather patterns stubbornly hold on in many areas. Conditions have been less than ideal in a number of areas east of the Rockies. Wet weather has been more difficult than in recent years. Persistently wet weather in the form of nuisance rains has slowed logging in the South and Gulf regions. The Northern Tier states were still getting sizable accumulations of snow in mid-April. Log supplies have been challenged by the conditions.
Despite weather concerns, market forces are a larger factor than weather in most areas. Log supplies have been limited by weather, which has been a factor but cash has also been a limiting factor. Companies that had heavy log decks have lost inventory to weather. Those who entered the wet period with lighter log decks are now working with hand-to-mouth log supplies.
Market forces are a larger factor than weather in many areas. The fiber crunch is having an impact on all levels of the hardwood industry.
Pulp and paper companies have been very competitive in their pursuit of fiber in a number of areas.
Other low-grade hardwood users are providing challenging competition for raw material where they are a factor. Rail ties, board road, crane and dragline mats are paying upwards of $100 more per thousand from the same industrial hardwood supply. This – understandably – puts pallet material at the back of the line.
This is all occurring across a backdrop of skyrocketing softwood prices. It is very rare for the softwood market to impact the hardwood market the way the current market is playing out. Extremely bullish pricing on softwood has created a movement back to hardwood pallets.
This has created an unusual reaction. Hardwood supplies have remained in a delicate balance, but the recent movement back to hardwood pallets is challenging supplies and raw material prices have taken on a bullish posture.
Most – if not all – of the market-related problems point back to infrastructure issues throughout the forest products industry. If the housing market continues to show solid growth and demand for wood remains stronger than supply, a lot of the infrastructure problems can be corrected. Until then the entire forest products market may be in for some intense growing pains.
(Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call 800-805-0263 and ask for Jeff.)