Ceteris Paribus

It’s been said that the big joke about Ceteris Paribus is that other things never are equal. Which is why economics is better at explaining what happened than predicting what will.

This wide-ranging article by B.C.’s Business columnist Roslyn Kunin questions whether Canada can play hardball on softwood. Kunin makes reference to reported increased housing starts in the U.S. and reduced supply of B.C’s timber resource. There is agreement that in the historic relationships of lumber supply and demand this would “push up the price of lumber”. Realities of today’s market-shaping forces however reveal recent pattern of seemingly inexplicable precipitous price drops, with ominous signs pointing to further declines still in the works. Expiration of the Softwood Lumber Agreement (SLA) October 12 sets the stage for further uncertainty.

Historically speaking,  it was largely U.S. markets that governed lumber pricing patterns in days gone by. Inroads into offshore markets began to have some impact, but it wasn’t until significant Chinese market demand came into play that the traditional patterns of cross-border trading truly felt global influence on pricing.

We were cautioned some time ago that if/when Chinese demand slowed, it would cause chaos in North American market pricing. Amid the talk of China’s downturn, throw in a little influence of beetle-killed timber, talk of a ‘wall-of-wood’ in combination with SLA expiry, and good luck with Ceteris Paribus analysis of lumber markets.

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Tree of Life

Headline stories making reference to trees usually catch our attention. Afterall, where would a lumber trader be without trees? However, the ‘Tree of Life’ story that caught our eye is all about the circular family tree of earth’s lifeforms. It’s truly amazing. Described here as the “first draft of the 3.5-billion-year history of how life evolved and diverged,” it is the most complete model of its kind, accounting for 2.3 million species of an estimated 8.7 million species on earth today. With approximately 15,000 new species discovered every year, we’re told the tree itself will evolve as scientists around the world contribute more data.

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Roadkill

Talk about animal instinct. From our office window just last week, Dakeryn traders happened to witness a family of raccoons moving out of their evergreen headquarters in Lower Lonsdale. How were these critters to know that by Monday of this week, the twelve pine trees called home would be gone? In this breathtaking video taken in the wild and exclusive to Harderblog, the “kits” can be seen following Mom and Dad’s precarious pawsteps. Navigating those branches would have been a breeze however, compared to the four lanes of zooming cars and trucks between here and Waterfront Park.

In a report at Safebee.com, we’re told that “No one wants to hurt a raccoon, rabbit, or turtle. And certainly no one wants to collide with a deer or moose. But as urban development cuts into woodlands, it forces wildlife onto roadways, making them an easy target in traffic.” John Griffin, director of urban wildlife solutions of the Humane Society of the United States explains “As the number of roads and drivers increases, an animal’s risk of becoming road kill also rises.”

Recently, one of our truckers transporting lumber described the challenges associated with overcoming seemingly routine hazards of the road. It was surprising to hear the number of wild birds that are struck. Naturally, the question then arose: What about crows?!

According to a report received today from RCP Transit in Island Pond, Vermont, researchers for the Massachusetts Turnpike Authority recently found over 200 dead crows near Greater Boston. There was concern they may have died from Avian Flu.

A Bird Pathologist examined the remains of all the crows, and, to everyone’s relief, confirmed the problem was definitely NOT Avian Flu. The cause of death appeared to be vehicular impacts.

However, during the detailed analysis it was noted that varying colors of paints appeared on the bird’s beaks and claws.

By analyzing these paint residues it was determined that 98% of the crows had been killed by impact with trucks, while only 2% were killed by an impact with a car.

The M.T.A. then hired an Ornithological Behaviorist to determine if there was a cause for the disproportionate percentages of truck kills versus car kills. He very quickly concluded the cause:

When crows eat road kill, they always have a look-out crow in a nearby tree to warn of impending danger.

They discovered that while all the look-out crows could shout  “Cah!”, not a single one could shout “Truck!”

SLA Standstill?

A column yesterday at LBMJournal quoted Ben Gann, Vice President of Legislative Affairs and Political Affairs, National Lumber and Building Material Dealers Association in Washington, DC. It was reported that, according to Gann, the Softwood Lumber Agreement “is likely to be extended as-is as part of a standstill period”. This suggestion merely adds to uncertainties that are presently shaping lumber markets. So I emailed Ben Gann this morning seeking clarification. In his response, he indicated that perhaps his comments were a bit misunderstood: “It is very likely that the agreement will expire on October 12, 2015 without an extension, ” said Gann. “The electoral politics of both countries are playing a role in the lack of an agreement. Canada’s parliamentary elections are next month and U.S. federal elections are in November 2016. It is unlikely that we will see a new agreement until next fall at the earliest, but probably not even then. In the near term, an expiration of the agreement may not mean much. Both countries are prohibited from taking unilateral action for one year following the expiration of the agreement. Even if it is October 13, 2016, and there is no agreement, I doubt either country will launch a trade action. Both countries appear willing to reach an agreement after a new president takes office in the U.S.”

Double Whammy

The impact of the Chinese market on domestic lumber prices has become increasingly more dramatic in recent times. In November 2013, a month in which the Random Lengths Framing Lumber Composite Price averaged $398, forest industry analyst David Elstone warned “If the Chinese were to stop buying today, the North American market would be in massive disarray.”

Fast forward to today. Demand has stalled in China (B.C. softwood lumber exports to Mainland China were down 18.1% in June and 19.5% in July, YOY). The Composite Price sits at $303. The inconvenient timing of China’s arrested demand, with the Softwood Lumber Agreement about to expire, is a double whammy for B.C. producers.

In today’s Vancouver Sun here, most probably agree with policy analyst Naomi Christensen’s view that it is in Canada’s interests to pursue a new Softwood Lumber Agreement. The weak loonie, rising production, and flailing offshore demand however would all seem to make the upcoming trade talks/negotiations with the U.S. especially problematic. It makes one wonder how much of the rationale for Canadian sawmill acquisitions south of the border is aimed at helping hedge revenue sources – exempt from the challenges in cross-border tariff discussions – as much as it is about securing timber.

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