Gurrent West Goast log not sustainable

are cxpected to move lower well into 2012. Initially strong demand for logs in the export market pushed prices up in late 20 l0 and well into 20 I l. to levels well abovc those in the South. scverely drmaging lhe compelilivc position of the lumber and plywood producers in thc Coast region. In turn, these high prices tripped off a series of market responses that will erode support fbr log prices in the Coast. inchrding rhe use of non-polluring sourccs of clectricitv Colurnbia \tista cttsures cluaiitl in mallv wrvs... 'Posts rrc crrctully kiln-dricd tirr immcdirtc usc 'llrcrc'. rr,r r,lJitiorrrl rlrr irtg to JJuic twi\liIl$ rnd warpinu down the road.

Thc damage dclne to lumber and plywood producers in the Coast is clearly illustrated in the chart at lower right, which contains the log costs at the mill in both the West Coast and the South. While these costs have languished at cyclical lows in the South, costs for Douglas-fir logs at the mill have increase 610/o from the third quarter of 2009 to the third quafter of 20 l I which moved them fiom near parity to a 667o premium compared to these same costs in the South.

These higher wood costs in the Coast damaged the competitive position of the region's converters in thc U.S. domestic market. ln the case of lumber, growth in offshore exports dampened the impact of high log costs. And the growth in offshtlre lumber export markets kept lumber prices in the Coast high relative to comparable items in the South.

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'lb rct thc fincst ir Douglas lir 4 x 4s,.just crll Colurnl>ia Vista todl rt.160-892-0770, ext. 1 10. It's lururt'lumbcr rt aftordrble priccsl

In turn, the higher prices for coastal lumber have driven the Coast's share of the U.S. domestic market lower. In the first half of 201 I shipments from the Coast were up 4.57c from the year-earlier pace, but aftcr netting out exports. the shipments into the U.S. market were uP a more modesl 2.7 c/o Over this same period, softwood lumber shipments from the South, net of exPorts. were up I l.lolc. So. the Coast's share of the U.S. market stalled aI 20o/a. while thc South's share increased from 36o/c, to 39Vo.

Consider that the gains were made at the expensc of Canadian lumber producers. so this was a missed opportunity to capture share of the U.S. market.

As long as the spread for wood costs between the South and West stays high, converters in the region will continue to lose share of the U.S. domestic market. This means that log prices in the Coast region will be increasingly dependent on the growth of lumber and log export demand to maintain current levels-no/ the level of exports, but the growth, because it will have to continue to expand and fill in the void left by continuing erosion in demand in the U.S. market.

Here lies the rub. Growth in lumber and log exports has stalled and evidence is pointing to a setback in both of these markets. The Chinese government's efforts to rein in the housing market through reducing credit availability have taken hold with floor space under construction down 2.77o in October and floor space sold down 9.97o, with smaller cities retreating faster than the major cities, according to Dragonomics.

And in the wood supply chain, this tightening has been manifest in buyers' inability to secure letters of credit (LCs) for lumber and log purchases. We have also heard stories of LCs not being honored after the wood is delivered and being pulled when it is in route. Finally, log and lumber inventories continue to back up at the ports as demand slumps. We expect exports to move lower through the end of this year and the first half of 2012, reflecting these recent developments. This is in line with the more tempered outlook for export demand in our forecasts in 2011.

One part of the equation not addressed here is the timber supply response. When growth in log supply first stalled and log prices started to erode, private log owners were quick to throttle back timber sales and support log prices. Through the end of the year and well into 2012, these sales will have to be even lower to offset the anticipated slump in offshore exports and this has to be done in lockstep with the drop in demand. This typically does not happen as supply responses usually lag behind any setback in demand.

Consequently, downward pressure on the wood costs in the Coast region is expected to mount and log prices are expected to move lower.

- Br.tb Berg ls R/S1'.r principal economist.for lumber and author of its monthl.v Lumber Commentary and its Five-Year and I S-Year North American Lumber Forecasts. He can be reached at (781) 734-8914 or bberg@risi.com.

Delivered Wood Costs in the U.S. West Coast and South

Western Woods

By Randy Engh, British Columbia Shake & Shingle Association