In his blog post last December, Forest2Market president and CEO, Pete Stewart made ten predictions for wood-consuming industries in 2015. The piece garnered lots of positive attention when it was written and while Pete may not have a personal crystal ball, his industry predictions were pretty spot on. So, how did Pete do?
1. The sleeping giant will awake to biomass demand.
Prediction: For years, the pulp and paper industry's attitude toward bioenergy demand has shifted between head-in-the-sand and wait-and-see. In 2015, this sleeping giant will awaken as pockets of the US South experience significant price appreciation, the result of increased competition.
Reality: Pockets of the US South did experience significant price appreciation. In the coastal North Carolina-Virginia wood basin, a wood basin with pellet demand, prices increased by more than 30 percent; interestingly, however, prices in two other wood basins in the South without any pellet demand also increased by more than 30 percent. Other wood basins with operating pellet mills saw price appreciation of 9-10 percent, while eight wood basins without operating pellet mills saw price appreciation between 8-11 percent. Price increases did occur only in pockets, a result of increased demand from all consumers, restricted supply of residual chips as a weak recovery in housing starts kept sawmillls from operating at previous levels, and above-average rainfall that restricted harvest activities.
Despite the fact that pellet demand alone didn’t cause price increases in these wood basins, the pulp and paper industry did start to oppose the pellet industry more publically. One of the first signs that heads were being lifted out of the sand was a suit filed by certain US pulp and paper companies with the European Commission opposing the coal-to-biomass conversion of RWE’s Lynemouth Power Station. Another was the fact that at least one pulp and paper CEO voiced strong concerns about the export pellet trade at industry meetings.
(It should be noted that the European Commission recently released a positive decision on UK support for RWE’s coal-to-biomass conversion of its Lynemouth Power Station, finding that the project would not distort wood raw material markets in the US South.)
2. Pine fiber supply will be tight and get tighter.
Prediction: There will be no easy way out of tight pine fiber markets in 2015. Pine fiber demand from pulp/paper mills, OSB mills, small log sawmills and pellet manufacturers will ratchet higher. It will be at least a decade, when trees planted after years of delayed sawtimber harvests will be ready for a first thinning, before supply restrictions abate.
Reality: At a landscape level, delivered conifer pulpwood supplies increased slightly in the US South and the Lake States, but decreased in the Pacific Northwest (PNW) and the Northeast. Even in the South, however, pine fiber supply has tightened in individual wood basins. Southeast Georgia and the Florida panhandle are two such markets. We expect this tightening will continue.
3. Conflict between new entrants and old will come to a head.
Prediction: New entrants are likely to face stiffer resistance to plans as forest products companies take a more active role in protecting their supply.
Reality: 2015 was the year of dueling studies on this topic. It was fairly common prior to 2015 for environmental groups to commission studies with pre-determined outcomes on the topic of the effects of the export industrial pellet trade. In 2015, however, the dueling studies were commissioned from inside the forest products industry. The American Forest and Paper Association, commissioned a study that the organization claimed showed that “U.K. pellet subsides are market-distorting,” though the study itself makes no such claim. The study does suggest that, if the entire subsidy provided to a UK utility were paid to the landowner for stumpage (which is unlikely to occur), the wood paying capacity for pellet mills would increase. The study also points out that wood paying capacity is a comparative measure, one used to determine which type of facility is more likely to be forced out of business if prices get too high. This study does not calculate wood paying capacity for other market participants, specifically pulp, paper and OSB mills. As a result, the study could not conclude that UK pellet subsidies are market distorting.
Also in 2015, the US Endowment for Forestry and Communities, the National Alliance of Forest Owners and the US Industrial Pellet Association commissioned a study that definitively demonstrated that price hikes were the result of multiple causes, not just increased pellet demand. Among the others are land ownership changes, sawmill ownership changes, decline in newsprint and print paper demand, increase in containerboard, fluff pulp and performance fiber demand, the housing market crash and Great Recession and precipitation events. The study also found that not a single pulp, paper or OSB mill closed as a result of a pellet mill opening or operating in its wood basin. This study, conducted by Forest2Market, shows that the forest products industry as a whole (new entrants and old) consumes wood in a way that is sustainable. See, as well, commentary at Prediction #1.
4. The pellet industry will grow because demand is tied to regulation, not economics.
Prediction: The industrial wood pellet industry will continue to grow despite the availability of much cheaper oil and natural gas because demand is tied not to these economic harbingers but to regulation. The extent of this growth will be determined once UK and EU requirements for sustainable biomass are clarified.
Based on missed deadlines for previous announcements on matters of sustainability, I have no prediction about when that might happen.
Reality: Roughly 3.6 million metric tons of wood pellets were shipped to the EU from the US South in 2014. The European Commission’s ruling on UK’s aid to Lynemouth, coupled with the ruling by the UK energy regulator, Ofgem, that the Sustainable Biomass Partnership’s Biomass Assurance Framework is compliant with legislation, end-user demand for wood pellets is stabilizing. As a result, Forest2Market estimates the majority of existing and near-term demand for pellets will be met by existing or under-construction pellet mills in the US South, which have a production capacity of 7.4 million metric tons. Beyond that, we estimate that an additional 3.4 million metric tons will be added to this amount between 2016 and 2020, for a total of 10.8 million metric tons. (These totals assume that the US South share of the EU pellet market will remain at the 2014 level of 40 percent.)
5. The strong US dollar will inhibit exports.
Prediction: Despite the feeling of many economists that the US dollar might be in trouble in 2014, the USD is actually in a strong position as the year closes. This will continue throughout 2015 and most of 2016. The downside, of course, is the crimp the strong USD puts in the competitive position of US manufactured goods around the world.
Reality: As of this writing, the US dollar is up more than 20 percent against a basket of currencies since mid-2014. The stronger greenback has helped to push exports down 4.3 percent through the first 10 months of this year.
Per the US Census Bureau YTD information, forest products export data includes:
Logs & Lumber: -14.8 percent
Pulpwood and wood pulp: -1.5 percent
Manufactured wood supplies: -13.4 percent
Newsprint: -4.1 percent
6. Weakening world economies will mean increased imports of wood and paper products to the US.
Prediction: Most other economies around the world are experiencing slower growth or contractions, and that means their manufactured goods will be good buys in the US.
Reality: Slow global growth reports (especially based on Q2 earnings reports) sent global markets tumbling in mid-summer. While there was a late-summer and early-fall rally, it looks as if markets will finish the year poorly. Global GDP is anemic and, as above, the US Census Bureau YTD information for forest products imports is not good news for US producers.
Plywood, veneers and engineered wood products: +14.1 percent
Paper and paper products +1.5 percent
7. No rebound in solid wood, on top of increasing imports, will degrade the economics for lumber mills.
Prediction: The housing market has stalled at 1 to 1.1 million starts (SAAR) annually. And we don’t see this getting significantly better in 2015 or 2016. Profitability at lumber mills will come under pressure as a result.
Reality: November housing starts were at a seasonally-adjusted annual rate (SAAR) of 1,173,000, or 10.5 percent above the revised October estimate of 1,062,000. We’ll have to wait on December data (published next month) to see how the yearly performance looks, but the metric is on course to hit the 1.1 million unit forecast.
For sawmills, the price for lumber is significantly below 2014’s level. The average price of southern yellow pine lumber in 2015 was $334.95/mbf, $45.40/mbf lower than 2014’s average. At the same time, sawtimber prices in the South have appreciated, higher by $1.34/mbf over 2014’s average. Sawmill margins were squeezed on both ends as a result.
In the Pacific Northwest, Greg Frohn’s post on the changing landscape, Pacific Northwest Mill Closures: Industry Adapts to Survive, demonstrates how changes in demand have put significant pressure on sawmill profitability, causing some mills to close.
8. China still drives the train, but the train will have fewer cars.
Prediction: China’s economy continues to dominate world markets, but growth has slowed. It will continue to slow in 2015, leading to lower demand for pulp, logs, lumber and recovered fiber from suppliers across the world. With European economies in the doldrums, these suppliers will look to the US markets as a place to off-load these commodities.
Reality: China’s economic growth slowed in Q3 to a six-year low of 6.9%, adding to concerns that the global economy is entering a period of low growth. That said, growth is still preferable to recession and China is still growing. Due to the continued strength of the USD, China sourced more forest products imports from other timber markets in 2015, including Russia, Scandinavia and New Zealand.
9. The Brazilian economy will weaken further in 2015.
Prediction: Along with a weaker Real and slack domestic markets, Brazilian solid wood producers will look to the US to move product. New hardwood kraft pulp production coming on line will seek a home in the US, putting further pressure of the US hardwood pulp producers.
Reality: The Brazilian economy contracted 4.5% in Q3 from a year earlier. The International Monetary Fund forecasts that Brazil’s GDP will shrink by 3% in 2015 and another 1% in 2016, which follows flatlining performance in 2014. As of this writing, Brazil’s Real dropped to 3.88 per USD—the worst performer among 31 major currencies—as the economy continues to shrink.
Forest industry companies targeting internal markets are struggling to stay profitable and stay in business. Construction and consumption, both supported by aggressive credit policies and government intervention, kept the domestic market for forest products running until 2014. Brazil is now paying the price for those aggressive and populist policies with a recession. And the effect is exacerbated by the fact that internal production costs are much higher than they have been in the past. According to Indústria Brasileira de Árvores (IBÁ, or Brazilian Tree Industry), wood production costs in Brazil were 40% lower than they were in the US in 2000; by 2014, however, this advantage had been reduced to less than 10%. In addition, the government increased energy costs significantly in 2014-2015.
The effects of the recession led several forest products companies to reduce costs by exchanging suppliers for lower cost ones, canceling new investments and laying off employees.
Pulp production in Brazil increased 4.6% between January-July of 2014 and January-July of 2015. Pulp exports increased 9.3% in the same period. Paper production may have suffered a small retraction (0.6%), but paper exports grew by 5.0% in this period. The tissue segment also grew in this period—22.2%.
Between January-July of 2014 and January-July of 2015, wood panel imports decreased 83% while exports increased 40%. As a result, traditional wood panel and flooring manufacturers are now racking their brains, pouring over forecasts and projections to determine whether it is safe to change commercial strategies and target international markets.
10. Wood-based biofuels and biochemicals markets will begin to toddle in 2015.
Prediction: These markets are currently in their infancy, equivalent to the size and shape of the pellet market in 2008. The fundamentals are favorable, however, so they may just find their feet in 2015.
Reality: Toddlers walk, but they also fall down. Progress is slow as a result. We have covered the Renewable Fuel Standard (RFS) progress this year, including the recent announcement that the EPA had finalized volumes for 2014-2016; these volumes were higher than preliminary numbers, which though not ideal, were heading in the right direction. There have been some positive developments for wood-based biofuels in 2015—most notably within the aviation industry. These markets continue to develop very slowly due to technology issues and economic disincentives brought about by favorable tax benefits for fossil energy. In 2015, for instance, Rentech switched from liquid to solid biofuels and KiOR closed its doors completely.