Lumber Industry Perspective
1st Quarter 2014
China’s Impact on Lumber
By Jesse Marzouk
Lumber prices weakened
slightly in the first quarter of
2014. The
Random Lengths
Framing Lumber Composite
Price (FLCP), which includes
prices from a variety of softwood framing species, ended at
$378 per thousand board feet
(MBF) after starting the quarter
at $390 per MBF. Bigger news
for Canadian mills was the
weakening of the Canadian
dollar by approximately 6%
against the U.S. dollar, which
raises net selling prices for Canadian mills, all else being
equal.
China has become an increasingly important part of
demand for North American
lumber over the last decade; as
a result, Hilco will analyze what
impact an economic slowdown
in China may have on the lumber market.
In 2013, China imported a
record high 3.75 billion board
feet of softwood lumber from the
U.S. and Canada, with 90%
coming from Canada. Almost
all of the lumber shipments
come from mills in British Columbia, Alberta, and the west
coast of the U.S. China accounted for approximately 7% of
shipments of North America
lumber. Unlike North America,
where lumber is primarily utilized in home construction and
repair and remodeling, China
utilizes 90% of its lumber for
concrete forming. As a result,
much of the lumber purchased
is lower grade economy lumber.
China acts as an outlet for this
grade of lumber and also purchases more lumber when prices fall. During the sharp correction in the second quarter of
2013, China stepped in to support the market and purchased
lumber at relatively cheap prices.
China also imports a large
volume of logs from the U.S.
and Canada, with approximately
two-thirds coming from the U.S.
This has resulted in extremely
high log prices on the west
coast of the U.S. and has
strained profitability for western
U.S. coastal mills, even with
lumber prices being relatively
high.
It now appears that a construction slowdown is in place in
China, partially orchestrated by
the Chinese government to transition to a consumer driven
economy. There have been
plenty of reports of the overbuilding and excess construction in China. If a construction
slowdown is indeed in place in
China, it would be expected that
lumber and log exports would
decline from the record levels of
2013, as the majority of lumber
is utilized in construction activities. Log prices would mostly
likely decline on the west coast
of both the U.S. and Canada.
This likely would boost profitability for U.S. west coast lumber
mills, which have been hardest
hit by high log prices. The impact upon lumber prices is less
easy to discern. If the housing
market in the U.S. continues to
recover, any slowdown in purchases by China could be made
up for by increased demand
from the U.S., as China accounts for small portion of total
North American shipments. A
decline in economy grade lumber prices is more likely than an
overall decline in lumber market
prices if China were to reduce
purchases.
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.