Sooring demsnd should keep lumber qnd pqnel prices slrong

/r\ OOD lirnr's lorrni trrct thc ttexl \ftir. 1gx1r Ior Nrrrtlt Amelican solid wood products as a clernancl-driven market pushes Prices higher. according to lI new leport by International WOOD Markets Research and R.E. Taylor & Associates.

"The main drivcr fttl thc solicl wood products sector will be the positive outlook for U.S. wood products consumption that is Predicted ttl remain strong through to 2004." explains Russell Taylor, publisher of the 600-page WOOD Mcrkets 2002: Solid Wood Products Outlook tct 2006. "supply-side dynamics are expected to be more balanced relative to demand (as compared to the over-supplied conditions in parts of 2000 and '01) leading to fitmer and/or stronger prices for most wood Products."

After persevering through the market crash in tech stocks in 2000 and then the Sept. I I terrorist attacks, the U.S. now appears poised to return to a robust, sustainable growth. A keY contributor to the recovery is the residential building sector, where prospective homebuyers have been taking full advantage of 40-year lows in mortgage rates since fourth quarter 2001.

Housing starts of 1.603 million in 2001 are forecast to rise progressively through to20O4, reaching 1.69 million units-the highest level since 1986. GDP growth should reach I .2Vo in 2OO1 ,2.1o/o in2002 and 3.8Vo in 2003.

The growth of the economy may have a down side where it maY be limited by inflation, potential labor shortages and rising energy costs. Such factors may force the Federal Reserve to rein in the economy by tightening money supply and raising interest rates. "However," says Taylor, "the improving economic outlook in the U.S., Europe and many regions of Asia is expected to bode well for wood products demand and commodity prices. Lumber, plywood and OSB panel prices should see stronger prices in 2A02, peaking in 2004. MDF and particleboard will not see any real price improvements until 2003."

Globql Supply

The world is not t'utltlitrg out of indLrstrial tirnber. "ln fact," says Taylor, "the globe hls generally beerl awash in pr-rlpwood. sawlogs and veneer lo-gs tirr most clf tlre second hall' of the 1990s and into 200(Y2001 ."

Regional sltortages have been sporadic and short-lived, keepin-e real log iand. lor the most parl eonrmodity wood products) prices subdued. Most experts do not predict any global timber shortages in the decade ahead and. in some cases, not for two decades However, with Russia's mainly undeveloped forests representing about half of the world's standing softwood timber, the potential of more investt.nent to that region could alter the global supply/demand balance sooner.

The U.S. now appears poised to return to a period of robust and sustainable growth.

materialll' over the next l0 ycars.

Sol tu trod log pt otlttcl ion/e,tnt1111ptiort ratcs indicate that l'iber-deficit rcgions are Asia and North Arllerica. Sr-rlplr-rs areas arc Southern Hemisphere plantation rcsions and Russia/ Northern Eulope. AboLrt 5% of thc w orld's fore st errea is in plantations. "Today." Taylor adds, "plantations are estir.nated to be producing about 35% of the worlcl's indr"rstrial roundwtlocl supply'. a t'igure projectecl to reach 44c/o by 2020." Global timber plantations have increascd more than tenfilld in area during the last 20 Years.

ln 1995, Russia replaced the U.S. as the world's largest log expofier and in 2001 China replaced JaPan as the world's largest log importer*trends that should continue. North American log exports have declined bY 40Vo since 1989. Europe had the largest volume increase in exports (.+817o)' but trade is mainly between European countries. The largest percentage increase in exports was bY Oceania (mainly New Zealand) at200+a/c.

Overall global population and economic growth will continue to increase industrial roundwood (logs) consumption, However, new PulPing, composite wood and veneerlPaPer overlay technologies are producing more efficient products that use less wood fiber and/or lower-cost wood resources not previously considered part of the industrial roundwood supply base. ConsequentlY, the suPPlY base is expanding in new areas, as previously non'usable fiber becomes economically viable and new plantations vield increased volumes of fastergrowing roundwood for superior, technologically enhanced products. These global trends should lessen demand for old-growth, higher cost logs.

Average global roundwood Prices have generally been decrea.sing since 1993 as the rate of increase in supply has exceeded the demand growth. This trend is not expected to change

There is a growing concern that the U.S. and Canada have lost their costcompetitive advantage as industrial roundwood andlor manuf-actured wood product exporters. "This may not be as serious a problem for U.S. manufacturers," says Taylor, "as increasing internal demand provides a good market for non-competitive exPorts. Canada, however. must exPofl more than 607o of its production to retain its current industry size and scale.':

The global environmental movement and certification process are increasing pressure on the industry to reduce native or old-growth harvesting, implement sustainable forestry practices, and increase the world's forest cover-all issues producers must address in the next five Years.

Nodh Americsn Softuoods

The report predicts a'relativelY ontimistic U.S. lumber market scenario through 2A04, assuming that a number of key economic and suPPlY resoonses occur. 'lThe end result is that lebounding U.S. housin.u starts. and repair and remodeling activity. will drive lurnber consurnption hicher through 2004." says Trrylor. "it it will allow lumber prices to move up to stronger levels than those expericnced in 200 I though not as high as the glory days of the nrid- 1990s."

The -rrreatest unknown element in the fbrecast (finalized in late Feb.) fbr North Arnerican softwood is the outcome of U.S.-Canada trade negotiations, which affect the supply response of Canadian. U.S. and offshore importers. not to mention the "floor price" of lurnber. However. the greatest econontic drivers impacting the forecasts are still the growth rate of the U.S. economy and the strength of the U.S. dollar. These factors will also influence sawrnill capacity and operatlng rates. which both can quickly alter the supply/demand balance in a positive or negative way.

Strong housing starts, fueled by a robust economy, will rnove lumber consumption to new record levels in 2004. While U.S. lumber consumption is fbrecast to increase by onty 300 million bd. ft. from 2001 to 53.9 billion bd. ft. in 2002, demand by 2004 should reach a record 56.7 billion ft.

Lumber consumption will also occur in repair and remodeling, which uses about 307o of all North American lumber. Predicted is a gain in demlnd of more than I billion ft. from 2001 ro 2004 (from 16.3 to 11.4 billion ft.).

While capacity levels ar many North American sawmills have been increasing over the last few years as a result of technological upgrades, the economics of sawmilling will continue to be one of the major factors limiting production levels in 200l and 2002.

,The North American production forecast is for steady advlnces from 2002 to 2004 to reach a record 66. I bif lion bd. ft. This compares to a 1999 peak of 65.5 billion ft. and 2001's 62.6 billion. Canadian outpui should rise 1.8 billion ft. from 2001 to 29.8 billion in 2004, while U.S. production climbs 1.6 billion ft. ta 36.2 billion.

Price are not forecast to reach record levels (although it is possible if 29Vo duties are maintained on Canadian lumber exports to the U.S.). However, on average they should offer good returns to producers.

Struclurql Ponels

The outlook also appears strong for North American OSB and plywood in 2002 ar.d 2003. On the supply side, no new OSB capacity is scheduled to starl up until nrid-2003, keeping production lcvels stcady in the short-term.

A: a rcsrrlt. hiulrel priccs itfe antie ipi.lted in 2002 and 2003. with favorable prices still expected in 200:1.

''Strtretural nllncl eon\utnpti()n i\ expected to rise almost unabated over the next five years given generally positive economic and housing outkroks." Taylor adds.

Structural panel production capacity will continue to grow to keep pace with overall North American demand. although supply may lag behind dernand in 2002 and especially 2003. No new OSB mills will start uo in 2001. us m()sl eompanies we|e scaretl otf a f'ew years ago by the threat of over'-capacity. The next wave starts with new capacity installations betwcen mid-2003 and 2005-06. when 10-l I mills are scheduled or planned, representing alrnost 8..5 billion sc1. ft.. an increase of 40a/o from 2001.

OSB attained a 5-5% market share of North American structural panel consunrption in 200 l. c<lmpared to iusI2Jlc in 1990. OSB should hold 65% ol the market by 2008. North American OSB production reached 21.65 bitlion sq. fi. in 2001-double that of 199.1 and tlipling 199 l's level.

OSB output should rise by another 6 billion ft. by 2006 to 21.6 billion fi. Plywood will remain under pressure and need to fit around the peaks ancl valley. ol' the OSB tupplj/demrntl balance. Following the sharp 2+ brllion-sq. ft. cutback in plywood production to 17.8 billion ft. in 2001, further reductions are expected to be less dramatic. Frcm 2002-2006, ongoing reductions in Norrh Arnerican plywood capacity totaling at teast I billion sq. ft. are expected-and more if markets are weaker than forecast or if additional OSB capacity is installed.

As in the pulp and paper industry, industry-wide planned or scheduled curtailments may limit the downside on prices. Improving prices are expected in 2003 and inro 2004, as rising consumption improves the supply/demand balance.

Non.Slructurol Ponels

With economic conditions expected to improve rapidly in the U.S. in2O022004, the dismal conditions of the North American particleboard market that existed at the end of 2001 should enjoy a reversal. Over the next live years expect steady growth in both the U.S. and Canada for particleboard, with new or proposed capacity coming from agricultural fibers (wheat, straw, etc.). As a result. output of North Amelican particleboard is expectcd to cxceed 7.2 billion sq. fi. by 2006-l billion ft. higher than 200I

During the Iast 20 years. North Arnerican MDF production growth has averaged ltt% a year. Output reached 2.,1 billion ft. in 2001 at 28 mills and may hit 3.2 billion by 2006.

A sur-ue of ner.'", MDF capacity be-rran in 1995. By 1997 the markel was awash in product. The capacity glut still exists. but 2001 was the first year since I996 that prices moved ofT the tloor. While a f'ew new MDF orojects have bren completed in reient years and others are being considered. most are expansions of existing rnills. diversification into thin board. or construction of specialized plants using ulternuti ve l'iber sourees.

Over the past 15 years. irnported MDF has supplied only 3c/c-5a/o of total domestic usage of MDF in any particular year. Since 1997. this rclationship has changed. with MDF irnports now poised to capfure more thun .10'i ol'tolal U.S. eonstrrnotion in 200 | . Thir fundumenrul rhilt should continue due to the MDF capacity in Canada and lower-cost off.shore countries. Canadian particleboard output is furecast to climb slowly but continuously. reaching alntost 2 billion sq. fi. in 2006 versus l.-57 billion fi. in 2001. With no new capacity in thc works :incc 1998. Cenudilrn operuting rate\ at MDF pltrnts har e heen irnplrrving steirdily. fionr a dismal l0% in l99l t<t 847o in 1999.85Vo in 2000 and U6% in 2001. By yeur's end. operatin.r reres should rise to 907o, the highest level since 1994. They should get even better in 200312004, reaching 92c/c ar a time when priees are likely ro be approaching their cyclical peak.

Particleboard imports have been low; but increasing with the strength of the U.S. dollar. Rising imports come from various regions, including South America, Europe and even Asia. MDF imports have also surged over the last l'ew years. with Canuda's market share of U.S. imports dropping despite large increases in its exports south of the border. Off-shore MDF suppliers include Germany, Chile and New Zealand.

After the price spikes of 1995 and 1996. panel prices moved closer to cost between 1997 and 2001. Taylor anticipates stable particleboard prices in the short term. 0ver the next five years. excess capacity plus more stable consumption levels will keep particleboard and MDF prices in check.