By Keith Norbury

Canada’s lumber export market is showing signs of awakening from its slumber since crashing in the wake of the 2008 recession. However, volumes and prices aren’t yet close to where they were pre-recession, say industry insiders. Signs also persist that recent gains in the market might not be sustainable. The market is, in a word, “fluid.” Nevertheless, the long-term consensus is that demand will continue to grow in wood-hungry China as well as in other emerging markets like India. Meanwhile, the slump in U.S. housing starts is not expected to last forever. It is already showing signs of activity, if only because of increased housing demand driven by population growth. Those demands should put upward price pressure on Canadian lumber, especially as supply diminishes with the harvesting of the most accessible timber damaged by B.C.’s notorious mountain pine beetle epidemic.

Chinese market volatile but with latent demand

“It’s not doom and gloom but it’s not really going full steam ahead like it used to,” said Alex Jovanovic, President of Seatrade Shipping Ltd., a small international freight-forwarding and logistics firm based in Vancouver. “About three, four, five months ago, China was gobbling up everything in terms of forest products from here.”

As recently as May, International Wood Markets Group (IWMG) reported that Canadian lumber exports to China had increased 3.7 per cent in the first quarter of 2012, despite a slowdown in residential construction in China. Those Canadian exports added up to 900 million board feet, mostly from B.C., and accounted for 47 per cent of China’s total softwood lumber imports.

A news release highlighting those numbers also noted that China’s softwood market appeared to be improving in April. Most of the report’s news looked good, such as a 23.5 per cent increase in real estate investment in China in the first quarter of 2012 compared with the same period last year. On the bad news side, though, floor space in newly started residential buildings dropped by 5.2 per cent year over year.

Peter Butzelaar, IWMG’s Vice-President, sighed when asked about the risk of Chinese demand softening. “I don’t really know how to read the tea leaves in China. They have a stated policy objective of constructing approximately 36 million low-income housing units between 2011 and 2015,” he said. “They’re well behind on their projections of getting those built. So, in a sense, there is still significant demand in China. It may get deferred, but that demand is latent and it will eventually have to be met.”

Statistics reveal that, in recent years, China has become an increasingly important export market for Canadian lumber, while the U.S. market has slumped. China imported 3.1 billion board feet of Canadian softwood in 2011 (Table A), up from 1.9 billion in 2010 and 1.1 billion in 2009, according to figures from Council of Forest Industries (COFI). In fact, those export volumes have risen in an almost unbroken line (save for a dip in 2005) from 60 million board feet in 2002. Volumes of spruce-pine-fir, known in the trade as SPF and which make up almost 90 per cent of China’s Canadian lumber imports, continued this increase for the first three months of 2012 (Table B). “Asia as a group is probably very significant but the overall impact of China is just astounding,” Mr. Butzelaar said.

U.S. market remains biggest but still limping

The U.S., however, remains Canada’s biggest export market for lumber. While recent sales volumes appear to have bottomed out, they were far below the 21.5 billion sales volume of 2005. The 1.95 billion board feet of SPF exported to the U.S. from this January to March is only a hair above the 1.9 billion shipped in that quarter in 2011.

Despite promising signs in the forest export sector, the overall market has definitely not recovered, said Wayne Iversen, Program Manager of Emerging Markets for COFI and the Canada Wood Group.

“If we’re looking at volume, China has definitely taken up a lot of wood. But even in volume, production capacity is nowhere near where it was four or five years ago,” Mr. Iversen said. The value is also low because of the inferior quality of pine-beetle-damaged wood that accounts for so much of production at present. “A very, very low percentage of what we’re producing now is number 1 and number 2 grade,” Mr. Iversen said. “A lot of it is economy grade or number 3 because of low recoveries from the dry wood.”

Almost all of that Canadian lumber bound for the U.S. travels there by truck or rail, unlike exports to China, which go by ocean carrier, either as breakbulk or in containers. Nearly all of those ocean-bound Canadian lumber exports are from B.C. In 2011, B.C. produced 4.85 billion of the country’s 5.17 billion board feet of overseas softwood lumber exports, according to COFI. Those exports were worth a total of $2.39 billion, of which B.C.’s share was $2.21 billion. Sixty-two per cent of those 5.17 billion board feet went China.

“It’s a very fluid marketplace,” said Keith Moger, Executive Vice-President of Operations for Western Stevedoring. “And switching between containers and breakbulk can happen very quickly.”

Jovanovic, who has almost daily contact with forestry mills in Canada, said one factor in that fluidity is that major companies like Canfor, West Fraser, Western Forest Products and Tolko dumped a lot of wood in China at low prices earlier this year. “They use China sometimes as an export avenue when they don’t want to mess up their domestic market or when there is a soft market domestically,” Mr. Jovanovic said. That has enabled the Chinese to stockpile inventory. As a consequence, now that supply has shrunk in the wake of explosions early in 2012 that shut down two B.C. sawmills in Prince George and at Burns Lake, Chinese buyers are not in any rush to buy. “So now you have high-priced domestic wood that essentially cannot find its way overseas because the other guys (Chinese) are sitting on a lot of wood that was bought $30 to $40 to $50 per thousand (board feet) lower than today’s prices,” Jovanovic said.

According to Natural Resources Canada’s weekly price monitor, the North American price for utility grade #3 kiln-dried western spruce-pine-fir (SPF) 2x4s was US$260 per thousand board feet on June 8, 2012. The 52-week average, though, was US$209 and had dipped as low as US$150 in December.

Shift from Europe to Asia

Western Stevedoring now exports about 300 million to 400 million board feet of lumber annually out of its Lynnterm operation on Burrard Inlet in North Vancouver. That’s down from about a billion board feet a year in the 1990s. Back then, there were strong markets in Europe and Japan, Mr. Moger noted. Japan is still an important market for Canadian lumber, particular higher grades. But the European market has all but vanished, which Mr. Moger attributes in part to competition from suppliers in Scandinavia.

The trend toward containerization has also cut into Lynnterm’s breakbulk volumes. Moger estimates that as much as 90 per cent of export lumber now goes as breakbulk. That sounds high to his colleague, Morley Strachan, President of Coast2000 Terminals Ltd., a wholly owned subsidiary of Western Stevedoring. Mr. Strachan figures the split is about 50-50. “What keeps prices honest is the option for forest product guys to go to breakbulk,” Mr. Strachan said.

The prime haul for containers is for consumer goods from Asia to North American, he noted. A container carrying TVs from Japan or Shanghai can fetch $2,000 in freight charges, he said, “and then on the return trip maybe lumber is only willing to pay $400 a container.” Some carriers don’t think that rate is enough to offset the loss of a container for a few weeks as it delivers its cargo to inland China. So that puts upward pressure on rates for lumber. When that happens, though, it makes breakbulk more attractive, said Mr. Strachan, who estimates that his terminal handles anywhere from 400 to 800 40-foot containers of lumber each month.

Containers also have the advantage of packaging smaller volumes and of protecting the cargo from the elements. That’s particularly important to a market like Japan, which demands high-grade product.

Japanese customers more particular

“China is obviously a growth market but they don’t really care as much as the Japanese about what lumber they’re getting,” Mr. Strachan said in expressing a common opinion. “It is very much price-driven. They want to get as much as they can for the least they can.” The statistics bear that out. China imported almost three times the volume of softwood lumber from Canada than Japan did in 2011 (3.11 billion to 1.16 billion board feet). However, a search of Industry Canada’s Trade Date Online revealed that the $1.14 billion value of lumber exports to China was only 1.5 times greater than the value of the exports to Japan.

Japanese demand is for wood used in fine finishing or decoration, whereas the Chinese use Canadian wood for concrete forming or to line the concrete floors and walls of multi-residential buildings in order to attach drywall or laminate flooring. In a similar way, India is also learning how to use Canadian softwood in construction, Mr. Iversen said.

“We’re seeing more activity in India now,” he said. “We expect that, within the next 10 years, the Indian market will probably be a good little niche market for our industry in B.C.” In the more immediate future, though, the big growth markets are expected to be China and the U.S.

“The Chinese market has been pretty stable recently,” said Elle Xu, Forest Products Manager for the Vancouver-based Canada Export Centre, which has ten overseas offices and owns sawmills in B.C. and Saskatchewan. “We also definitely see an increase in the U.S. market. They’ve been building fewer houses in the past three years but their population is still increasing at the same speed. Now they’re trying to build more houses; so they need more lumber. We can see that from the data for past few months this year.”

The Centre’s two mills produce a total of about 150,000 cubic metres of lumber annually, with most going to the U.S. and only 5 to 10 per cent to China.

Mr. Jovanovic said his contacts tell him the U.S. market is starting to pick up, and that domestic mills have healthy order files in which production is being pre-sold three weeks in advance. However, he doesn’t see that as a sign of a rebound in U.S. housing starts or of a recovering economy down South. “It’s more a function of inventories being so low,” he said. “And traditionally when that happens, another round of impulsive buying follows.”

The bright side of beetles

When the U.S. housing market rebounds, that might even create more opportunities for Canadian exports to China. “One of the subtle expectations that I have heard from Canadian producers is that they are optimistic that current U.S. exports to China and Asia will pull back if and when the U.S. market returns to its high levels of demand,” Mr. Butzelaar said. “So it may create more space in the marketplace for Canadian exporters when the U.S. market turns. B.C. coastal producers would most likely take advantage of that, and they are ocean-going vessel shippers.”

In a similar way, the pine-beetle scourge which has devastated B.C. forests might also have a profitable outcome. Once the last of that economically accessible dead wood is harvested and processed a few years from now, it will leave B.C. with a severe wood fibre shortage. “That may lead to higher lumber prices in the future,” Ms. Xu said. “With reduced supply and higher demand because of the U.S. housing market, it could be great for us in the next few years.”

Jovanovic said he is already hearing from lumber wholesalers about mills finding it difficult to obtain fibre and the higher prices that are becoming the norm. “They have to be more creative, or instead of buying 20 containers they buy one or two,” Mr. Jovanovic said. “The mills are also more selective about who they sell to.”

One market on which everyone associated with the lumber trade in Canada is counting is China. Mr. Jovanovic says mills might be preparing for a slack summer but they expect the market to strengthen by September through to the end of the year.

Beyond that, COFI is projecting a fibre shortage in China of 150 million cubic metres, or 63.6 billion board feet, by 2015. That was more than Canada’s entire timber harvest in 2009. “Well, I hope it continues because that’s my market,” Mr. Strachan said of China’s demand for Canadian wood. “I can’t control it. It’s at the whims of the forest product companies and when they go to the markets. So I’m just thankful that a lot of companies have decided to keep their fingers in the export market.”