Blame it on oil. That’s right – oil is the source of all evil.
Well, maybe that overstates it slightly, but buyers and sellers of industrial wood in Canada have a problem — a problem that many blame on issues related to oil.
Going directly to the oil issue may be jumping the gun in this instance. Let’s go back to square one and outline some of the problems and see how they relate to oil.
There is a mountain of factors weighing heavily against Canada’s forest products industry. The North American housing industry is sluggish. The problem is more pronounced in the U.S. than in Canada, but sluggishness in both countries impacts Canadian lumber markets.
Grade markets throughout Canada – much like in the U.S. — have been hit hard by the soft demand for stock. The situation affects both hardwood and softwood grade markets. When housing construction slows, so does demand for wood – whether it is wood in the form of studs, flooring, cabinets or other building products that go into a home. As the housing market goes, so goes the demand for grade lumber.
The softwood grade market has been affected enough to force production cuts in most markets.
The hardwood grade market in Canada is not immune to the hard knocks being dished out by the sluggish North American housing industry. The hardwood forest products industry has reacted much the same as its U.S. counterpart by reducing hardwood production.
How does this affect Canadian industrial wood markets in general? And how does this affect the businesses that are in or serve the pallet market?
Production cuts at sawmills serve several purposes. When mills are unable to make money at current price levels, it only makes sense to stop selling at those price levels. If that isn’t effective, the next step is to stop sawing. Although this is the basic principle of shutdowns or production curtailments, often the strategy is used in hopes of influencing the market. The strategy can often help to tighten short term grade lumber supplies enough to at least stop price retreats.
Although these strategies are aimed at grade market correction, often industrial wood markets bear the brunt of them, not the upper grade markets.
Most of Canada’s population lives within 100 miles of the U.S. border, and 75% lives in the metropolitan regions of major cities. Many Canadian forest products conduct business in the U.S., given their close proximity to the border. In fact, many forest products companies have as much as 80% of their business anchored in U.S. markets.
This is not isolated to the forest products industry, either. Over 84% of Canadian exports go to the U.S.
The volume of cross-border activity is where oil becomes an issue. Higher oil prices the past two years boosted North American oil production. Canada’s oil industry grew white hot. It was good for the Canadian economy. It kept money moving, and it kept the housing industry from faltering the way it did in the U.S. Pallet demand was stronger than the U.S.
Then, a funny thing happened on the way to the bank. All that Canadian prosperity, coming while the U.S. economy was not so strong, began to have an effect. It was being noticed in world markets, too. The Canadian dollar gained strength. While the Canadian dollar was heading upward, the U.S. dollar was losing ground.
The difference between the two currencies was wiped out faster than anyone could have ever anticipated. Not long ago the U.S. dollar was worth over $1.60 Canadian. Earlier in the year the two currencies were less than four cents apart; recently, they have been within 7 cents.
Needless to say, Canadian companies exporting to the U.S. suddenly felt the pinch of the radical shift in the currency exchange rates.
It would be hard to imagine another industry that would have been hit any harder than the forest products industry.
The newest incarnation of the Softwood Lumber Agreement (SLA), implemented in October of 2006, introduced a 15% tax on lumber going into the U.S. This also made it quite difficult for Canadian sawmills to compete in the U.S., and it is one of the factors that slowed grade markets in Canada.
The slowing of grade markets in turn forced the production cuts noted above. The production curtailments mean less downfall material that normally finds its way into the hands of the pallet industry.
Industrial softwood supplies tightened throughout Canada. The Western provinces were not hit as hard as the East, where bug-kill timber boosted the amount of lower grade softwood. Even with supplies tightening, the Western provinces appeared to have unwanted surplus until demand from the Middle East cleared most of the surplus.
The Eastern industrial softwood market experienced the return of two-tiered pricing for two-tiered quality. The trend was very common a few years ago and has resurfaced. Contacts often report the lower quality level is not worth buying for pallets.
The low-grade hardwood market has been dealing with modestly tight supplies and a bullish posture that has lasted for quite some time but remains stubbornly steady.
The negative effect of the dramatic shift in the currency exchange rate between the U.S. and Canada has had a big impact on forest products markets throughout Canada – and you can blame it on oil.
(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.)
