Market Enters Summer Doldrums, Recovery Unpredictable

Those of us that have been in the business for some time know the forest products industry is cyclical. This cyclicality is in full swing on the downside. Lumber prices are well off their highs of two years ago and as low in real terms as I have ever seen them. Housing starts have retreated to levels not seen since 1992—a recession year. Poor market conditions, coupled with an 8 month supply of unsold new homes (4 months is viewed by most as the average)—is putting downward pressure on home prices, lumber prices and sawtimber prices.

No one really likes to see these downturns, but they do have a self-correcting aspect to them, and from a pure economic perspective, are healthy. Unfortunately, when your paycheck depends on it, the pain is felt none-the-less.

There was a ray of optimism in March and April when lumber prices showed some strength in front of the spring building season; however optimism quickly faded when lumber prices weakened after the July 4th holiday. F2M expects that it will take at least 12 months for builders to rid themselves of their unsold inventory and the market to fully correct.

Many timber growers will take a wait and see attitude and sawmills will buy logs on an “as needed” basis. For the near term, I do not expect to see much volatility in sawtimber markets and do not expect to see the fall/winter price bump that we are accustomed to—outside of extraordinary circumstances.

On the other hand, commercial construction seems to be humming along, creating a strong demand for plywood. This, coupled with a weak dollar keeping imports at bay, is holding up the price of plywood. Unfortunately, for landowners, this has not been enough to keep sawlog prices from retreating. The plywood mills will continue to benefit from sluggish demand on the sawtimber side.

Another bright spot is the pulp and paper business. Generally strong demand for all paper products, except for newsprint (a perennial loser), has kept demand and thus price, strong for all pulpwood products. New market specific demand from wood pellet plants and new demands for residual wood chips have increased supply pressures and are keeping pulpwood demand strong. This will lead to an overall healthy environment for pulpwood pricing into the next period.

These emerging trends could have profound effects on our industry. The wood pellet plants, which I wrote at length about last quarter, will place demands on pulpwood never before seen in the market. F2M believes that this is a long term market dynamic. Secondly, the market effect of a growing demand for carbon credits is unknown, but momentum for carbon credits is building in a positive direction, and could prove to be advantageous for timber growers.

As positive as these trends are for the timberland owner, they are equally negative for the pulp manufacturer. I believe that these trends pose a real threat to pulp manufactures. Currently, these trends are viewed by pulp producers as the number one threat to their rising cost structure. I believe that these threats are real and do pose real issues for our domestic pulp producing customers and can only be perceived as negative for them.

Likewise, to the extent the carbon credit market, changes forest management to produce less timber or puts restriction on the amount or timing of harvests, may have lasting impacts on the supply of logs and fiber.

These markets are in their infancy, but certainly have the potential for long lasting impacts. Whether you are a buyer or seller of logs and fiber, keeping a close eye on these markets would be wise.

It is a very interesting, if not, troubling time for landowners and manufactures alike.

As always, thanks for your business and thanks for your commitment to Forest2Market.