China will continue to buy more pulp in 2019 as its continued moratorium on Mixed Paper imports (as a feedstock) drives more virgin pulp demand. Brazil’s pulp producers are best poised to take advantage of the situation due to their production capacity and low-cost global position. As long as global GDP remains robust, pulp prices will remain strong.
2. US South sawtimber markets will remain flat.
Though significant, the impacts of Hurricanes Florence and Michael were focused in local markets where salvage operations will continue to influence prices. However, the trend will not ripple outwards to affect the US South region as a whole. With an additional 1 billion board feet (BBF) of production coming online in 2019, the region will consume 2-3 million more tons of sawtimber, but there will not be any appreciable movement in price.
3. Canadian investment in US forest products assets and timberland will slow, but European flows will increase
The pace of Canadian investment into US forest products assets will subside. The primary supply issue that drove much of the initial investment—the Mountain Pine Beetle (MPB) infestation—is largely played out as the MPB-destroyed forests have either been cut or won’t ever be cut. However, the political, trade and exchange rate dynamics—as well as escalating prices and uncertainty—in Europe will drive capital offshore. Look for expanded European investment into US timberland and forest assets, which offer a safe haven amid some of the turmoil in Europe.
4. US bioenergy segment will remain flat, but global growth opportunities take shape in Asia
Strangely enough, the Trump Administration really hasn’t impacted the wood bioenergy segment either way, and forward-thinking bioenergy companies simply continue to move ahead with commitments to expand the use of bioenergy. Despite the lack of loan guarantees, private companies will continue to fund R&D in 2019 and beyond. Increasing Asian demand for wood pellets will continue; expect significant new pellet investment and capacity in the US South (2 million+ tons) to meet additional demand.
5. The US dollar (USD) will depreciate.
The USD will depreciate slightly against both the CAD and EUR in 2019. Citing moderating global growth, materially weaker outlook for the oil sector, a faster-than-expected deceleration of inflation, and a drop in business investment, the Bank of Canada sees little reason to expect a near-term CAD rebound. The EUR may hold steady for the time being, but the European Union (EU) is set to unveil plans—including using the EUR as the default currency in energy contracts agreed between EU member states and third countries—for challenging the USD’s dominance in global markets. In 2019, the CAD will range between C$1.306 and C$1.336, and the EUR €0.848 to €0.886.
6. Brazilian forest sector will continue to expand.
With the recent election of a new, “no nonsense” government led by Jair Bolsonaro, Brazil’s business class is hoping to finally move beyond the political and economic crises of the recent decade. Exchange rates will remain favorable and competitive for Brazilian plywood producers, particularly as Brazilian businesses and the new government get comfortable with each other. In the latter half of the year, the Brazilian Real will strengthen to around R$3.50 per USD, a level at which will continue to support Brazil’s share of global exports.
7. British Columbia (BC) will lose more lumber production.
Tariffs added to lower lumber prices combined with restricted log supply will result in a shift in production capacity. BC will reduce capacity by 1BBF of lumber, which will be offset by increased capacity in the US South that will marginally affect supply. With fewer housing starts in the near term, expect lumber prices to be flat in 2019.
8. Housing starts will retract, market will flatten.
The hot housing market is beginning to cool. Rising home prices, lower affordability and increasing interest rates are pricing many would-be homebuyers out of the market. Single-family starts recently dropped to their lowest level since May 2017 and will continue to struggle; however, multifamily construction will inch up and remodeling demand will continue to be strong. When the final numbers come in, housing starts for 2018 will average 1.262 million units (+4.4% compared to 2017), and 2019’s average will be 1.232 million units (-2.3% relative to 2018).
9. CLT and engineered wood products will continue to expand.
With recent passage of the Farm Bill in both the House and Senate, investment and commercial interest in cross-laminated timber (CLT) and other engineered wood products will continue to increase. The new Farm Bill authorizes the Timber Innovation Act, which was introduced in 2017 and incentivizes investment and R&D into these and other wood products that can support multi-level structures taller than six stories. Fourteen mass timber code change proposals have also been approved, clearing the way for their inclusion in the 2021 International Building Code (IBC). The timber code change proposals create three new types of construction in the United States, setting fire safety requirements and allowable heights, areas, and number of stories for tall mass timber buildings up to 18 stories tall. Look for continued investment in this sector and growth in the PNW and the Northeast—regions that are home to some of the pioneers of these technologies.
10. Economy will shrink, US GDP will follow.
GDP growth (+2.3% in 4Q2018) will trend lower through 2019 before turning modestly higher in 2020. The dollar’s relative strength and position will make US exports less competitive in the global market, which will shave a few tenths of a percentage point off GDP in 2019. Economic growth in 2019 will moderate as higher interest rates impact the economy and tighter financial conditions drive a general deceleration. As a result, GDP growth will average +2.3% in 2019.
11. Industry in the Pacific Northwest will continue to shrink.
While regional mills are getting some log price relief due to tariffs that will continue through the first half of 2019, the PNW has captured and contained virtually all of its available market and growth opportunities are non-existent. The region is severely resource-constrained; there are no additional resources available for increased log production, which means there is no additional residual supply and, by extension, no more users of residuals to affect the market. Without drastic changes in federal policy, the PNW will experience zero growth for the foreseeable future.