Lumber Industry Perspective 3rd Quarter 2016

Potential Duties Hang Over Lumber Market

By Jesse Marzouk

Lumber prices increased slightly overall in the third quarter of 2016 after rising in the first half of the year. The Random Lengths Framing Lumber Composite Price, which includes prices from a variety of soft- wood framing species, ended at $356 per thousand board feet (MBF) after starting the quarter at $347 per MBF.

Going into the fourth quarter, the central issue in the industry is whether or not a soft-wood lumber agreement (SLA) between the U.S. and Canada can be reached. The prior SLA expired on October 12, 2015, and Canadian mills have been shipping to the U.S. without duties or quotas ever since. This resulted in a significant increase in shipments to the U.S. from Canada. According to Statistics Canada, Canadian exports to the U.S. increased 19% year-to-date August 2016, whereas the U.S. Census Bureau shows a 34% increase in U.S. imports from Canada for the same period. Typically the disparity between U.S. and Canadian data is minimal. In either case, Canada’s share of the U.S. lumber market for 2016, through August, topped 30% for the first time since 2007.

Not only has a new agreement yet to be reached, but no trade cases have been brought. Under the terms of the SLA, a trade case could have been brought as early as October 13, 2016.

If a trade case is filed and duties are enacted, it could take a few months before the U.S. Department of Commerce reaches a preliminary ruling, at which time duties could be collected. If enacted, duties may range from 20% to 30%, a historically high figure. The implementation of duties likely would occur towards the end of the first quarter of 2017, if a trade case is filed by the end of October 2016. In certain instances, duties also can be retroactively applied up to 90 days. Certain conditions need to be met be-fore duties can be retroactively applied, including a recent significant increase in shipments, although the level of increase is undetermined. Nonetheless, the difference in trade data between the U.S. and Canada is critical.

Further, the timing of potential duties is problematic for Canadian sawmills because cash flow needs are highest at the beginning of the year, when mills are building log inventory before the arrival of spring break-up. A retroactive application of duties would be difficult for some producers to handle.

If duties are applied, the ability of Canadian sawmills, particularly those in Western Canada, to direct lumber to other markets could be challenged as well. North American shipments of softwood lumber to China declined 12% year-to-date August 2016, as the Chinese economy has slowed.

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 Jesse Marzouk is a vice president and forestry products specialist. He has appraised numerous U.S. and Canadian pulp, paper, and lumber-related companies involved in manufacturing and distribution. Jesse received his MBA in finance from Kellogg School of Management at Northwestern University, and has a degree in finance and accounting from Indiana University.