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North American Lumber OutlookIndustry resilience amidst unprecedented economic turmoil
2020 | Fastmarkets | North American Virtual Conference
Dustin Jalbert
Senior Economist, Wood Products
1
Agenda
• Current market conditions & drivers of record price levels
• Impact of COVID-19 on demand through 2022
• Supply implications and challenges from offshore
• Outlook for industry profitability going forward
• Take home points and conclusions
2020 | Fastmarkets | North American Virtual Conference 2
Current market conditionsExtreme volatility in the wake of choppy demand
and aggressive sawmill curtailments
2020 | Fastmarkets | North American Virtual Conference
Lumber prices have soared to record highs, smashing the 2018 record over the summer
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AVC for high-cost region RL Framing Lumber Composite W. SPF 2b 2x4 W. SYP 2b 2x4
Random Lengths Weekly Report, monthly average, US dollars per MBF
2020 | Fastmarkets | North American Virtual Conference 4
US softwood lumber demand growth tepid since 2017, but was poised to accelerate into 2020 prior to COVID-19
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Apparent consumption Four-quarter moving average
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Quarterly US softwood lumber apparent consumption, BBF, annualized rate
2010-2016 avg: 5.9%
2020 | Fastmarkets | North American Virtual Conference
2017-2019 avg: 1.1%
Sawmill curtailments piled up in the spring
• Announced temporary curtailments totaled more than 1.3 BBF
from late March through early May
• Shift cuts and trimmed workweeks went under the radar
• Approximately 20-30% of the industry curtailed in April alone
Sawmill production data now seem to confirm this
North American SADJ production down 18% in April and 15% in May from February levels
• May restarts due to tighter market conditions, higher-than-expected demand
• Indefinite/permanent curtailments thus far
Klausner Live Oak, FL – bankruptcy
GP, DeQuincy, LA – indefinite curtailment
Canfor’s Isle Pierre, BC – permanent closure
2020 | Fastmarkets | North American Virtual Conference 6
DIY boom showing signs of cooling, but building and garden center sales were exceptionally strong through July
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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Retail sales in Building Materials, Garden Equipment and Supplies Dealers Total retail sales (including food service)
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US retail sales, year-over-year percentage change
2020 | Fastmarkets | North American Virtual Conference
Google search results for “Build a…” spiked in April and May and remain elevated
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Deck Porch Fence Shed Garage
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Google Trends search results, 100 = highest search frequency
Note: Data pulled on 9/10/2020.
2020 | Fastmarkets | North American Virtual Conference
Housing data continue impressive rebound…starts in September look promising
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Single-family housing starts Multifamily housing starts NAHB HMI (R)
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Housing starts, single-family, SAAR, thousand units; NAHB HMI
2020 | Fastmarkets | North American Virtual Conference
Demand on mills has been much steadier than expected, and is now likely surging above recent seasonal norms
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2017 2018 2019 Average (2017-2019) 2020 Forecast
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North American demand on mills, BBF, monthly, NSA
2020 | Fastmarkets | North American Virtual Conference
March-June:
DOWN 2% to 5% YoY
July-September:
UP 2% to 4% YoY
October-December:
DOWN 1% to 2% YoY
Wood products output is still encumbered by the impact of COVID-19 despite restarted capacity
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Wood products employment, thousands, seasonally adjusted
2020 | Fastmarkets | North American Virtual Conference
WP employment still down
4.5% from February levels
Mill stocks have fallen as producers sold out of inventory through April and May
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Jan-1
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Mar-
14
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Jul-14
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Jan-1
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Jan-1
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US mill stocks Canadian mill stocks US avg (2014-2017) CA avg (2014-2017)
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North American softwood lumber mill inventories, BBF
Source: WWPA, Statscan, Fastmarkets RISI.
2020 | Fastmarkets | North American Virtual Conference
Channel inventories have likely been falling since 2017, and remain very lean
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US softwood lumber inventory estimate, months of supply
Source: WWPA, Fastmarkets RISI.
2020 | Fastmarkets | North American Virtual Conference
North American lumber demandDemand remains resilient in North America, and
will accelerate into 2022
2020 | Fastmarkets | North American Virtual Conference 14
Demand summary,
CAGR 2020-2022
• US consumption: 1.9%
• CA consumption: 0.5%
• Net exports: 0.8%
• Demand on mills: 1.5%
2020 | Fastmarkets | North American Virtual Conference
Demand on mills will fall 700 MMBF in 2020, but return to growth and hit 60 BBF by 2022
0.7%-3.0%
-1.1% 1.7%4.0%
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US Canadian Net exports
27%35% 34%
34%47%
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R&R Single-family Multifamily Mobile Industrial Nonresidential
Residential construction will continue to drive lumber demand going forward
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US lumber consumption by end use, BBF
2020 | Fastmarkets | North American Virtual Conference
US lumber exports will likely rebound as the global economy reaccelerates, but competition offshore will remain fierce
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SYP Treated Other SYP & treated share (R)
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Total US softwood lumber exports (BBF), SYP and treated share of exports (right axis)
2020 | Fastmarkets | North American Virtual Conference
Canadian offshore exports will remain subdued going forward with reduced export capacity and stiff competition
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Canadian offshore softwood lumber exports (BBF), monthly
2020 | Fastmarkets | North American Virtual Conference
Source: COFI, Fastmarkets RISI.
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China Japan Other offshore China share (R)
North American supplyRecord prices and subdued wood costs will keep mill
closures minimal for the time being
2020 | Fastmarkets | North American Virtual Conference 19
Duty relief coming in November, but Canadian mills still relatively high cost in key markets
Key points
• DOC announced
Canadian duties will drop
from combined 20% to 8%
in November
• Relief in BC as stumpage
rates adjust from elevated
levels in 2019
• US South, still the lowest-
cost supplier, continues to
dominate the market
• European supply is VERY
competitive in the Gulf and
Atlantic Coast regions
2020 | Fastmarkets | North American Virtual Conference
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US South Europe US Inland Ontario Quebec US W Coast BC Interior
Average variable costs Freight Duty
North American softwood lumber delivered variable costs,¹ delivered to Dallas-Fort Worth,
third quarter 2020 estimate
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1. Adjusted for product mix and underweights.
European lumber exports to the US have increased six-fold since 2014! And the volume will continue to rise
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2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Europe Latin America South/East Asia Oceania
212020 | Fastmarkets | North American Virtual Conference
US offshore imports by supplying region, BBF
Capacity outlook: Growth in US South tempered by losses in British Columbia
US South + 2.4 BBF
US West Coast + 0.2
US Inland + 0.1
Other US + 0.1
British Columbia - 0.8
Rest of Canada + 0.5
North America + 2.4 BBF
Substitution effect
Income effect
Supply outlook, 2019-2022
2020 | Fastmarkets | North American Virtual Conference
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US South US West Coast US Inland Other US British Columbia Rest of Canada
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Southern lumber share of US consumption (R) US South lumber production All-time high (2Q06)
Substitution to SYP will continue going forward as SPF becomes less available and demand grows
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US South lumber production (BBF, quarterly); US South share of US consumption (right axis)
2020 | Fastmarkets | North American Virtual Conference
How will 2020 wildfire season impact supply picture?
Substitution effect
Income effect
2020 | Fastmarkets | North American Virtual Conference
Wildfire impact
Mill type
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Profitability outlookSawmill margins set to correct after record shattering year
2020 | Fastmarkets | North American Virtual Conference
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D/C ratio Downtime adjusted D/C ratio¹
North American operating rates expected to drop into 2020 and rebound modestly through 2022
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Demand/capacity ratio for North American softwood lumber
2020 | Fastmarkets | North American Virtual Conference
1. Adjusted for Fastmarkets RISI’s estimated and assumed downtime through September 2020.
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1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12 1Q14 1Q16 1Q18 1Q20 1Q22
KD Douglas-fir 2x4/AVC SYP (West) 2x4/AVC
Cash margins will remain elevated for SYP, keeping sawmill investment in the US South extremely attractive
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SYP and Douglas-fir 2&B 2x4 price divided by average variable costs
2020 | Fastmarkets | North American Virtual Conference
Take home points
• Markets are out of equilibrium, but a correction is underway as
demand slows seasonally and COVID supply impact subsides
• US and Canadian domestic consumption will be flat in 2020 as
residential investment remains resilient, and rebound from 2021 forward
• Net exports will remain pressured by weak demand offshore and European
imports further penetrating the East and Gulf Coasts
• Capacity in North America will grow 2.4 BBF through 2022, driven by the US South,
while sawmill capacity investment is restrained in BC and the Pacific Northwest
• Operating rates will average 81% in 2020, but will ascend to 84% by 2022 as demand
recovers, supply additions restrained outside of US South
• Risks include resurgence in COVID-19 that drives further shutdowns in 4Q20 and
1Q21; upside risk if recession impact remains contained to retail and food service;
Oregon wildfires a wildcard to supply
2020 | Fastmarkets | North American Virtual Conference 28
Thank you for your attention!
Lumber Commentary
www.risi.com/lumbercommentary
North American Lumber Forecast, 5- and 15-year
www.risi.com/lumber5year
www.risi.com/lumber15year
Outlook for US Offshore Lumber Imports
www.risi.com/US_lumber_imports
Dustin Jalbert, [email protected]
For more information:
2020 | Fastmarkets | North American Virtual Conference