Montreal Wood Convention 2018: Outlook for North American market for softwood lumber

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The sixth annual Montreal Wood Convention took place at the Fairmont The Queen Elizabeth in downtown Montreal on the 21st of March 2018 and it presented some of the outlooks for the Canadian wood industry sector. Among the factors that influence the industry, the labor shortage came to be the biggest concern for lumber yards nowadays.

Paul Quinn (in the left photo), paper and forest products analyst at RBC, explained that the modest recovery in oil prices and the highly accommodative monitory policy strengthening the US market has moved the Canadian economy to almost full capacity, even if there is some downside risk, all around the trade protectionism.

The export growth rate in Canada has been generally good and this should accelerate going forward with the lower Canadian dollar. Canada’s GDP growth was pretty strong during 2013 and 2014, at 2.5% and 2.6%, but slowed down during 2015 and 2016, largely because of the weakness in oil prices. Yet, ever since the oil prices have picked up in 2017, this is really pushing the Canadian economy to full capacity.

Going forward, export growth is expected to benefit from a still weak Canadian dollar and strengthening US growth, though with trade protectionism presenting a clear downside risk.

As for the housing sector, Quinn explained that resales across Canada have been very strong, but RBC forecasts it is going to drop due to new taxes, as well as some of the restrictions around mortgage and higher rates from the Bank of Canada. Also, the Canadian household debt income ratio will soon become higher than the US debt income ratio, which is not a good sign.

In terms of household spending, the accommodative monetary policy is supporting interest ratesensitive sectors though poor affordability and tightening mortgage lending standards have recently started to weigh on housing.

“We expect an accommodative monitory policy and a stimulative fiscal policy. This is really around tax reform and some of the things that the Trump administration is bringing in, that will keep the US growth above average pace, despite the rising oil prices,” Quinn said, discussing about the US economic outlook.

US’s real GDP was 2.3% in 2017 and is forecast to reach 2.6% in 2018 and slowing a bit in 2019. Moreover, the US payrole employment growth has been steady , but is slowing on limited supply , as opposed to weak demand.

“The US unemployment rate has really dropped to levels that we haven’t seen for some time now. Because of the tight labor market that is putting upward pressure on wage inflation,” Quinn explained.

The US household formations remain strong, at trend level 1.1 million. RBC compared the current pace of the housing recovery and the past recoveries and the current pace is well below. Last year’s starts were 1.2 million in starts, and the forecast is for 1.5 million somewhere around 2019.

The housing starts in the US are forecast to reach 1.3 million in 2018 and 1.35 million in 2019, which is a 6-7% growth year-on-year. Also, the single-family houses are experiencing a growing trend, of 66% this year, which is a big contrast with Canada, where it’s significantly lower.

There have been 137 million new units built in the US and while new and existing home sales fell year-on-year in January, the medium prices were higher.

“The biggest problem on homebuilding right now seems to be labor,” said Quinn, also explaining that home ownership is low, due to the millennial generation.

As for lumber, the prices hit record levels in 2018 due to B.C.'s record fire season, hurricanes Irma and Harvey and then the California fires, which greatly affected lumber prices in 2017.

Lumber margins are continuing to move higher.

"People are making significantly more money even with the 20 per cent duties... Those duties really have no basis," Quinn said.

The Canadian lumber prices ran up in anticipation of duties and while prices looked set to correct, natural disasters (particularly BC forest fires) caused prices to spike over H2/2017.

B.C. forest fires exacerbated an already tight inventory environment and with the demand picture looking strong, lumber prices are expected to average higher again in 2018.

Log supply is a major source of concern for the industry. In Canada, the mountain pine beetle infestation from B.C. will dramatically reduce the province’s supply of timber from 2017 onwards, while this issue has also caused log costs and stumpage rates to rise at a much faster pace. Now, nearly half of the province’s total lumber capacity is facing a more than 50% drop in harvestable pine volume, with an additional 28% facing declines of 25- 50%.

Mr Quinn also briefly presented the most recent list of top 20 producers of softwood lumber in NA. Notwithstanding M&A activity over the last years the top 20 producers do not produce more then 58% of the total production of softwood lumber and own 205 mills out of a total estimated 891 mills (2009 count). 

For the supporting graphics of the conference here 

Full video conference: 

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