Insufficient supply at the beginning of the new year
In the US, this year was characterized by a softwood lumber madness (“Lumbermania”). In 2020, there was a 14 million m³ worldwide gap between supply and demand. As a result, warehouses were empty in the US. This led to record lumber prices and, consequently, to record revenues.
US housing starts hit a 15-year high this year and will likely remain at a high level. The demand for wood is driven mainly by two factors: On the one hand, people aged 25 to 34 are starting to build their own homes and on the other hand, new houses are needed because the widespread shift to home office due to COVID-19 leads to a migration to the suburbs. Demand for homes could exceed supply by 2025.
Prices above average in the future
US demand for softwood lumber will continue to grow. Canfor’s CEO therefore assumes that while lumber prices will not return to the record prices of May 2021, they will “remain above the historical average level in the long term”.
Kayne predicted that the need for renovation will increase again as soon as lumber prices are back to “normal” again.
The accumulation of damaged wood in the years from 1999 to 2015 changed the sawmill landscape in British Columbia, Canfor’s home province. What Kayne told the audience about British Columbia may serve as a warning for the Central European countries affected by similar calamities. “Damaged wood, wildfires and forests being put under protection reduced annual logging from 90 million m³ to less than 50 million m³,” Kayne said. For Canfor, increasing investments in the southern United States were the way out. While log prices in western Canada are three times the price recorded in 2020, the longleaf pine only costs a third of that in the US South.
To make matters even more challenging, US import tariffs on Canadian softwood lumber will rise from 9% to 18% for most producers.
| Region | Production | Demand |
|---|---|---|
| Canada | 59 | 21 |
| Europe | 165 | 144 |
| Russia | 66 | 14 |
| USA | 99 | 135 |
| China | 28 | 71 |
| Japan | 20 | 28 |
| 2018 | 2020 | 2025 | |
|---|---|---|---|
| Demand | 481 | 498 | 526 |
| Supply | 491 | 484 | 526 |
| Gap | 10 | –14 | 0 |
CLT boom until 2035
Amazon, Google and Microsoft have multi-story timber construction projects, the basis for which is CLT. Kayne expects the number of CLT buildings to double every two years. He predicts a demand of 12 to 16.5 million m³ and the creation of entire “timber cities” by 2035.
Demand for wood will continue to increase in Asia, namely in China. Canfor estimates that China’s GDP will grow by 9% each year until 2025.
Prices down, balance achieved, logistics still costly
After the record first half-year of 2021, which has already been discussed, the situation has been changing since July. Vadim Eresko, Lumber Sales Director of the Segezha Group, identified the following trends since then: a seasonal decrease in construction activity, postponement of construction projects until 2022, restoration of the balance between supply and demand, increase in inventory levels, change in price trend. Prices of raw materials and the cost of logistics services remain high.
In 2022, softwood lumber production in Russia will increase by 1.1 million m³ to 41 million m³, as Eresko predicts. Exports are going to rise from 29.2 million m³ this year to 30.4 million m³ in 2022.
US softwood lumber price (2-by-4 Western SPF, KD, #2&better) from week 1/2018 to week 14/2022 (actual size, free Great Lakes region, in €/m³) – blue: Canfor forecast; yellow: forecast Lumber Futures for November sales; dotted line: average; source: Holzkurier/Madison’s Lumber Reporter until week 40/2021; forecast Canfor/RISI/Random Lengths, forecast Futures/conversion by Holzkurier © Holzkurier
New price level in China
Stock levels in China are slowly returning to the normal volume of 1 million m³. The relocation of processing sites in China will soon be over, and Eresko expects demand to normalize then. Prices will reach a new level in China. “The price level could be 40% above the pre-COVID one,” Eresko said. “The European market will still be dependent on US prices. In the event of a price increase, Europe will ship big quantities to the US, freeing up the Chinese market for Russian exports,” Eresko analyzed. “When prices are low, European volumes will remain in Europe.” As a result, price volatility will increase.
Supposedly bad customer who buys 20%
Pallet wood price index of the FEFPEB until Q2 2021 – black: Germany, green: Italy (Q1 2009 = 100%) © FEFPEB
Rob van Hoesel, President of the European Federation of Wooden Pallet and Packaging Manufacturers (FEFPEB), talked about the industry’s serious problems in a very amusing way. The price of the lumber used for the production of packaging rose to 300% of the 2009 value by the middle of the year. “In the packaging industry, raw material accounts for 70 to 75% of the total cost. When you know that few euros can make the difference between profit and loss, you can imagine the situation we’re currently in,” van Hoesel complained in Helsinki. “Many sawmills see us as bad customers – but we really have to fight for every euro.” He underlined the importance of his industry with one figure: “The packaging industry needs 20% of the produced lumber.”
For van Hoesel, the current price is a disaster. More stable prices and fewer price differences between suppliers would also be important for the industry. When purchase prices are stable and the same for everyone, everybody would be able to pay good prices, including to forest owners. The only condition is that availability must be guaranteed. “Otherwise, the situation will become critical for us and our customers,” van Hoesel concluded.
