We'll be taking a break over the holidays. But not before we close the year with another list of predictions for wood consuming industries in 2016, from Forest2Market's President and CEO, Pete Stewart. Curious to see how Pete did on last year's predictions? Click the scorecard to find out.
US pulp and paper producers will experience some tightening as exports wane.
Most of the growth in demand for pulp and paper products will come from the non-Western world. Demand in both North America and Europe will be flat to lower, while Africa, Asia Pacific, Latin America and the Middle East will all see upticks. Overall, the strongest growth categories will be for market pulp, packaging, tissue and towels and specialties.
The US dollar will remain strong compared to other currencies, however, and as a result, US producers will struggle to compete in global markets because exports from the US will be 20 percent more expensive than end products from other countries.
Expect domestic long fiber (conifer) supply to remain tight, keeping prices elevated.
Demand for pine fiber will increase; growth in OSB production (a result of the slow recovery in housing), pulp and paper production (a result of global demand) and industrial wood pellet production (a result of new capacity coming online) will exert pressure on the demand side. On the supply side, the reduction in sawtimber harvests due to the slow housing recovery has reduced the amount of pulpwood available to the market. A combination of these demand and supply pressures will keep prices elevated throughout 2016.
Abundant softwood sawtimber inventory keeps log prices in check in the US South; in the Northwest, log prices are due for a reset.
Due to the combination of oversupply in pine sawtimber that built up in US South forests during the recession and lackluster demand, softwood sawtimber prices will remain low. This is likely to be the case for the next decade.
In the Northwest, however, high log prices coupled with waning demand from Asian markets has placed so much pressure on sawmills that more closures are likely to take place in 2016. A sawlog price reset will be needed in order for sawmills in the region to be competitive.
Domestic lumber markets will continue to be capped by a slow housing recovery (1.0-1.2 MM starts); new construction will continue to be weighted heavily to multifamily as millennials still opt to rent in urban areas.
2016 will not be a break out year for the US housing market. Millennials—the population cohort in their prime home buying years—would like to purchase homes, though fewer (compared to the historic trend) have the resources to do so. Instead, they will continue to opt for rentals in urban areas in 2016.
Still, we are on the leading edge of growth, tenuous though it may be. Unemployment is at 5 percent, the number of people rejoining the workforce is trending higher, and we started to see some wage inflation last month as well. Together with the Fed’s first hike in the interest rate, these indicators all point to a stronger economy.
Market participants are reacting to these signs, especially in the South where log prices are low and likely to remain so. In 2016, new lumber capacity will be announced, and we expect the trend in foreign investment in southern sawmills will continue as well. Full recovery of the housing market is still in the future, however.
Industrial wood pellet capacity in the US plateaus as EU targets are being fulfilled. New pellet plants are developed, but not at same pace as 2014 and 2015.
Total production capacity of operating and under-construction industrial wood pellet mills will be 7.4 million metric tons in 2016. Demand from three coal-to-biomass conversions in the UK (a total of 5 million metric tons) and projects in the Netherlands (3.5 million metric tons—the cap on biomass co-firing set by the government) will likely mean additional production capacity will be necessary, but at current market share for the US South of 40 percent, this will represent another 3.4 million metric tons of production capacity that will need to be added beyond 2016. Fewer new projects will break ground as a result.
Brazil’s domestic sawnwood markets will struggle as the recession continues, though exports remain strong. Broader Latin America keeps growing.
Hard times will persist in Brazil in 2016. GDP will contract 2-3 percent. Pulp exports will continue strong as the weak Real is a boon on the revenue side, especially versus the US Dollar and Euro.
Economies in other Latin American countries—Peru, Columbia, Ecuador and Chile, to name a few—continue to grow and contribute to the rising demand for pulp and paper products.
European lumber/solid wood markets struggle mightily as Europe enters a low or no growth year. EU traders will not be able to push enough volume to the Middle East to make up the difference.
In response to weak demand in their traditional markets in the UK and France, much of the lumber being produced in Scandinavia has been diverted to the Middle East, where it is reasonably competitive in price. Political turmoil throughout the region has led to supply and demand disruptions in 2015; this turmoil will only intensify in 2016, causing more consternation for Scandinavian sawmills.
Because it will be coupled with the difficulties EU currency countries have competing with non-EU currency countries like Poland and Belarus, Scandinavian sawmills will face significant challenges in 2016.
Biofuels will develop to the next level as pilot plants come on line.
The commitments made by 195 countries at COP21 to limit the warming of the earth to "well below" 2 degrees, a feat that would require the entire world to be completely off fossil fuels by 2050 provides confidence for investors in biofuels. Low carbon renewable transportation fuels will gain traction as a result. Several promising technologies are going through the DOE funding process and at least one has been approved as an advanced biofuel that will receive government subsidies. It remains to be seen the degree of impact the Clean Power Plan will have on biofuel investment. It is safe to say, however, that the passage of the CPP will spawn more investment, not less, in biofuels.
Corporate sustainability efforts will lead more and more companies to substitute wood for fossil fuels, and companies will focus on biochemicals as a result.
Corporations producing chemicals and plastics are turning to biomaterials as a renewable substitute for fossil fuels in their manufacturing processes. Companies will make this move in response to consumer preference for end products that are greener and more sustainable despite low oil prices. This nascent industry will start “feeling its oats” in 2016, not enough to move markets, but enough to draw attention.