While CNN “terror analysts” quibble over definition of murder in concerns over mischaracterizing mass killings as acts of terrorism, it seems timely to answer another one of the Harderblog beginning of the year questions: Will security issues, including concerns over international terrorism, directly impact the lumber business? Short answer: No. Lumber markets are not much different than most financial markets in their response to what’s making news. As explained at Investopedia:
“Markets detest uncertainty, which is why the knee-jerk reaction of markets to a terrorist attack is initially invariably downward. But markets have proved enormously resilient to such attacks in the past and after the initial negative reaction, the focus turns to economic fundamentals as conviction grows that such attacks are usually the work of radicalized elements acting in isolation.”
Reports tell us that it will be business as usual in the wake of the killings in Paris or San Bernardino.
It’s worth looking at the question in a bit more depth. We note there are many articles written on the effects of terrorism on business. In considering the impact specifically on the lumber business, it seems that the area of transportation of product to market holds one of the most relevant areas of direct concern. An article in this paper reconsiders the effects of terrorism on trade: “The conventional wisdom is that trade with a nation affected by terrorism involves higher risks. The consequent rise in the transaction costs is akin to a rise in transportation costs, which tends to reduce trade.”
We’ve read other reports suggesting that transportation and insurance costs are anticipated to increase because of security surcharges on cargo in a riskier business environment. In fact, some reports indicate an increase in property and casualty premiums of 12% to 30%, or higher in various cases. Other reports indicate that some insurance companies have even increased the number of countries subject to “war risk” surcharges. This means shipping lines must notify marine underwriters before their vessels move into designated waters, as these vessels may be subject to significant additional insurance premiums. Customers will most likely assume the additional cost.
In consideration of lumber shipments by rail to North American markets, some reports suggest that transport of hazardous materials could be more vulnerable to greater risks of acts of terrorism.
“On any given day, thousands of trains move across the American landscape. Each one of them presents a potential threat to the safety of individuals and families, to the continued functioning of our communities and our economy, and to the life of our great cities. Whether carrying millions of workers to and from their jobs, or providing the safest means of transporting hazardous materials, or bringing food and agricultural necessities to consumers, railroads pose an inviting target to would-be terrorists. Yet no significant act of terrorism has been directed against U.S. railroads, and we lack hard information on the nature of the terrorist risks involved in rail transport. This report highlights the potential threats, examines the response of government and the rail industry to the post-9/11 security responsibilities, and suggests ways in which public policy and rail operations can be better directed to meet the challenges of security in an age of terrorist activity.”
In this regard, the passage last Thursday of a $325 billion Transportation Bill by U.S. Congress is seen as a major step toward funding enhanced infrastructure in U.S. markets, lending promise of better controls on transportation routes critical to moving lumber safely.