China’s appetite for imported lumber is lessening as its economy has weakened, and the immediate impact is trickling down favorably to the pallet industry and other industrial lumber users.
“Everything basically seems to have stopped in its tracks in 2015,” said Bill Luppold, a U.S. Forest Service economist who specializes in forest inventory and analysis, particularly the hardwood sector.
“Right now, the big thing controlling most world markets is the lack of growth in China,” Luppold observed in an interview about lumber markets. China is the #1 export market for U.S. hardwood lumber, but exports to the Asian country are down about 10% so far this year, according to Luppold. Last year the United States exported 750 million board feet of hardwood lumber to China. A 10% decline is equivalent to 75 million board feet. In addition, the other top two export markets, Canada and Vietnam, respectively, also are buying less U.S. lumber. Exports to Canada are down about 14%, and to Vietnam, about 16%.
(A lot of the hardwood exported to China and Vietnam returns to the United States as imported furniture. As Luppold noted in an article he authored with Matthew Bumgardner for the December 2014 issue of Pallet Enterprise, China and Vietnam emerged as major hardwood lumber consumers when the U.S. began to rapidly lose its biggest market – the furniture industry – after 2000.)
Although markets have weakened, “One thing that is improving is finding more and more lumber available,” said Luppold. However, he was quick to add that with losses in grade markets, principally led by reduced exports, “you may not have as much grade lumber in the future.”
The past 18-24 months have seen a downturn in pricing for #1 common and better, he said, although pricing began to stabilize this year. “The market just isn’t out there for grade lumber.”
The weakness in grade markets will make more material available for industrial products, observed Luppold, who noted that pallet lumber prices already have fallen somewhat.
“We’ve basically had anemic growth in all aspects of the hardwood market,” said Luppold, since the 2009 economic downturn, which was led by the precipitous burst of the housing industry bubble. “One thing that was doing really well relative everything else was exports…pallets and crossties were hanging in there pretty good, too.”
Unless the homebuilding industry exerts a significant, sustained increase, there is little prospect of lumber markets strengthening given the weakening of leading export markets. “We’ve been improving since 2009,” said Luppold, “but the improvements have been marginal.” Pricing “firmed up a lot in 2012-13, then started to lose some ground last year although they recently have been stabilizing.
“Production has caught up with demand,” said Luppold. Demand is not displaying the robustness that it had been. Domestic lumber demand “is still very low.”
The lumber industry is heavily dependent to the housing industry and overall economic activity, both domestic and global, observed Luppold. “Although we’re not seeing the type of decline that we saw in the 2008-09, we’re seeing a very, very slow increase in demand, and likely that demand has been interrupted by China’s reduced consumption.”
Softwood lumber producers face similar issues because of weakness in markets, noted Luppold.
In fact, the economic downturn in China also has affected softwood lumber markets, according to Shawn Church, editor of Random Lengths, which reports on softwood commodity markets. “The Chinese were buying a lot of grade, off-grade,” said Church. “They have pulled back,” a reflection of the bursting of the country’s real estate bubble and the contracting economy. Church cited the same reduction in Chinese lumber imports as Luppold – about 10% year-to-date.
“That means more wood is available to the North American market,” said Church. In fact, low-grade softwood lumber prices have fallen considerably compared to this point a year ago. In early September 2014 the Random Length low-grade composite index was at $283 per thousand board feet; the same week this year the index was at $172. “From a cost standpoint for pallet makers, that has to be a good thing,” observed Church, who characterized prices for low-grade material as “very competitive right now.”
There are other related factors at play, noted Church. In developing lumber markets in China, the Canadians to a certain degree undermined their own secondary manufacturing industry, he said. “There are not as many secondary manufacturers now in Canada to buy that product.” In addition, Canada currently enjoys a substantial advantage in the currency exchange rate. “Selling product to the U.S. is very attractive right now.”
“Globally, the U.S. market is the best market right now,” added Church.
China’s economic slowdown appears to be worsening, The New York Times reported in early September. Weaker demand from overseas buyers is cutting into Chinese exports; exports fell 5.5% in August compared to the same month a year ago, and the value of exported goods has dipped 1.4% for the first eight months of 2014.
China’s manufacturing sector is losing competitiveness, according to the Times report, as labor costs rise, and despite being devalued in August, its currency remains strong; Chinese goods are more expensive for overseas buyers than a year ago.
More importantly for lumber markets, China’s imports are falling even more sharply; they fell in August for the 10th straight month with a drop of 14% by value. “The declines are a clear sign of weakening domestic demand in China as a slump in manufacturing and new housing construction drag on economic growth,” said the Times report.
China’s economic woes have extended to global stock markets; its stock market has plunged 40% since June, and the volatility has impacted other stock markets.
It was inevitable that China’s economy would slow, as an article on the CNN Money website pointed out in early September. In fact, the government is imposing reforms in order to move the country away from relying on building roads, railways and housing to generate growth, to an economy fueled by consumer spending.
Beijing’s growth target for the year is 7%, which it met in the first six months. China’s economy had been expanding by 10% annually, but 7% is still strong enough to create new jobs and keep employment steady.
The global economics team at Wall Street powerhouse Citibank has warned that the Chinese economy likely will carry the world into a recession at some point in 2016 and continue into 2017, according to a report by The Telegraph, a British newspaper. Citibank analysts put the risk of a global recession at 55% believing that a slowdown concentrated in emerging markets will pull down demand and weaken the global economy.
