rbulent times ahead for lumber and panels

QTRONG North American lumber and panel markets in \t2000 should give way to at least four more turbulent years, according to a new R.E. Taylor & Associates study.

"While 2000 looks like it will be a continuation of 1999 for at least the first half of the year, the prospects of declining demand in the U.S. for 2001 and the onslaught of new OSB capacity in2O02 paints a cloudy picture ahead for the industry," says Russell Taylor. "Volume and prices in the U.S. market should be good in 2000, although not as good as 1999, which broke many records."

He adds: "Industry consolidation, wood and non-wood substitutes, off-shore competition, distribution channel dynamics, e-commerce and the renewal of the Softwood Lumber Agreement in April 2001 will all be key challenges to meet head on. This means that the industry needs to get ready for some tougher times ahead."

Softwood Lumber

According to the 400-p. "Wood Markets 2000" report, U.S. lumber demand will remain stable through 2004 due to strong U.S. and global economic factors and monetary policy. For 2000, another demand spurt will bolster the unprecedented economic growth started in 1991.

Substitutes for construction grade lumber (engineered wood, steel, plastic, vinyl, etc.;-will increase 500 million bd. ft. per year. Softwood lumber imports from Europe and the Southern Hemisphere will climb by IAOVo-from 900 million bd. ft. in 1999 to well over 2 billion bd. ft. by 2005.

Total Canadian production rose 3Vo in 1999 to 28 billion bd. ft., but should slip to 27.6 billion ft. in 2000 and to 27.5 billion in 2001. The Softwood Lumber Agreement after April 20Ol will be the wild card in the lumber scenario.

In 1999, U.S. output reached 36.4 billion bd. ft., the highest since 1989, partly due to the softwood pact. From 2000 to 2004, total U.S. lumber production is expected to move toward a sustainable level of 35 billion ft.

U.S. average annual lumber prices are expected to be off by only ZVo to 47o in 2000, while most export prices (except green hemlock in Japan) should improve. From 2001 to 2003, prices will be tempered by more competitive markets and slightly lower economic growth.

Plywood/OSB

While 2000 should be another great year for structural panels, a wave of new OSB plants will intensify overcapacity starting in 2001. In 1999, softwood plywood and OSB usage in North America was estimated at a record 39.4 billion sq. ft. Increased demand was due chiefly to soaring housing starts and greater use of panels per new start. Consumption in 2000 and 20Ol will decline slightly due to lower starts and CDP, but pick up again in 2002 and 2003, approaching 1999 levels.

Over the next five years, North American OSB capacity should climb from 20.9 billion sq. ft. to over 28.4 billion ft. (about 2 billion ft. from incremental capacity "creep" at existing plants and up to 6 billion from new installations and expansions at up to l0 locations). But by the end of 2004, capacity could exceed demand by over 3 billion ft. While competition from OSB has caused southern plywood output to fall since 1996, strong demand provided a reprieve against further mill closures in 1999, with production at 12.3 billion sq. ft. By 2004, competition from OSB could push U.S. plywood output well below I I billion ft. Weak export markets will see a big reversal. By 2004, plywood exports will rebound 60Vo and OSB exports 757o. OSB and plywood prices should be healthy in 2000, due to strong housing demand and little new capacity. However, small production increases and easing demand by the second half of the year should result in average prices about lTVo lower than 1999's near-record average of $26044SF. Still, prices will be double cash costs.

Given plywood's cost structure and the upcoming growth of OSB capacity, plywood prices will suffer greater downward price pressure during the coming years. Plywood prices could fall by 2oc/o-a point nearing breakeven levels for many mills.

Production/capacity rates may fall as low as 85% from 1999's lofty rates of over 97Vo. Plywood production and capacity will gradually erode through to 2004.

Particleboard/MDF

Excess capacity in MDF and particleboard will lower North American operating rates and panel prices for most of the five-year forecast period. However, MDF could finally improve since little new capacity is planned in North America. While particleboard has enjoyed higher operating rates in the late 1990s, new planned capacity for 2000 to 2002 could create oversupply.

The most significant capacity-based wild card is the emerging fiber technologies of urban waste utilization and strawboard. Strawboard offers a low-cost alternative to particleboard and lower grades of MDF. Up to a dozen new plants could create a surge in new capacity, adversely affecting MDF and particleboard output and prices.

Timber Supply

The world is not running out of wood in the short-tenn. Shortages are not expected for at least a decade. Regional deficits (and surpluses) will occur frequently, but not prolonged shortages due to ample, diverse global resources. Consequently, higher timber prices are likely during periods of strons demand.