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Global Wood Consuming Industries: 2016 YTD in Review

August 30, 2016
Author: Pete Stewart

At the end of 2015, I put together a list of predictions for global wood consuming businesses for 2016. While 2016 has provided many geopolitical and economic surprises thus far, the sluggish performance of the forest products sector is not unique to the industry. Rather, the underlying tenor of apprehension and global uncertainty has caused a degree of economic paralysis, limiting new investment in existing industries. This is simply the reality for now—the new normal, as we feel our way through a contentious US election season, a splintering European Union (EU) and complex global trade agreements.

A fresh assessment of my more timely predictions from last year follows.

  • US pulp and paper producers will experience some tightening as exports wane.

Industry consumption in this segment has indeed flattened, which has further dampened exports. The not seasonally adjusted producer price index (PPI) for Pulp, Paper & Allied Products is down 0.7 percent year over year (YoY). This situation is driven by a strong US dollar, which recently hit a four-month high. While recently-released currency data reflects the period before the United Kingdom (UK) voted to leave the EU, the dollar continues to perform well. Latin American producers are beginning to show signs of a recovery, and the strong dollar has allowed them to reach deep into US markets.


  • Expect domestic long fiber (conifer) supply to remain tight, keeping prices elevated.

The increase in chip supply markets has been higher than anticipated, as incremental demand for lumber resulted in more residual chips finding their wBrown_woodchip_mulch.jpgay to market. Conifer pulpwood prices remain regionally elevated, but not quite as high as we had projected. Mill closures in the Northeast have had a dramatic effect on this market; delivered price dropped $5.09 per ton in 1H2016 compared to the same period last year, and demand decreased a whopping 30.2 percent. The US South continues to import less expensive South American pulp, which has decreased demand for pulpwood and moderated price increases.


  • Abundant softwood sawtimber inventory keeps log prices in check in the US South; in the Northwest, log prices are due for a reset.

At the end of 1H2016, log prices in the US South remain low. Delivered sawtimber prices averaged $341.03/MBF ($41.95/ton), decreasing $5.47/MBF ($0.67/ton or 1.6 percent) over 1H2015’s average price. Demand for these logs increased by 8.6 percent. 1H2016 log prices in the Northwest were mixed, although the gap between domestic prices and export prices—$42/MBF in 1H2015—has contracted: domestic prices reset by falling $33.90/MBF (-5.4 percent) as demand remained flat, and export prices increased $3.95/MBF (0.7 percent) as demand decreased 6.4 percent. US imports of Canadian lumber are up 42 percent YTD through May, another factor affecting sawtimber prices.


  • 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.

Housing starts dropped 5.8 percentage points to a seasonally adjusted annual rate (SAAR) of 1,142,000 units in August. Single-family starts accounted for 722,000 units, which is 6 percent below the revised July figure of 768,000. Housing completions and permits also ticked downward in August. Completions were at a SAAR of 1,043,000, which is 3.4 percentage points below the revised July estimate of 1,080,000; permits were at a SAAR of 1,139,000, which is 0.4 percentage point below the revised July estimate of 1,144,000.

 Housing Market Data a Mixed Bag as Peak Season Comes to a Close


  • 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.

As I noted in last year’s prediction, wood pellet demand from three coal-to-biomass conversions in the UK and projects in the Netherlands will likely mean that additional production capacity will be necessary in the future. No one quite knows how the Brexit vote will affect biomass and environmental policy in the UK, but it looks like projects that were slated to come online either have, or will soon. Due to this uncertainty, we have seen (and will continue to see) a pullback in new pellet project investment in the EU. While 1H2016 has played out as I thought it would, a high degree of uncertainty will affect this segment in the near and long terms.


  • Brazil’s domestic markets will struggle as the recession continues, though exports remain strong.

At the end of 1H2016, Brazil’s GDP was at -1 percent, which is the least negative it has been in over 18 months. With a drastic political shakeup underway, many economists believe that Brazil’s economy will grow in mid-2017 and create an environment suitable for new investment in its forest products industry. The pulp sector, for instance, is poised for rapid growth; production has increased roughly 10 percent every year since 2013.

At the end of June, Brazil's largest paper producer and exporter, Klabin inaugurated its newest pulp mill investing US $2.6 billion—the highest private-sector investment ever made in the state of Paraná. The pulp sector is also pumping investment dollars into Mato Grosso do Sul, where Fibria and Eldorado—the two largest producers of Brazilian pulp—recently announced investments of US $4 billion to expand their mills. Once complete, most likely in 2019, the two plants will have a capacity of 6.75 million tons annually, a 125 percent increase. 


I wish I could tell you that Forest2Market sees a quickening pace of business in the near term, but sadly we do not. At mid-year, we are facing many headwinds: upcoming elections, a strong US dollar, global unrest and economic uncertainty, the degradation of the European economy, little recovery in China, and the list goes on. One bright spot is that we don’t expect a recession in the near term; the US economy is growing, albeit slowly.

Forest2Market's Economic Outlook


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