An Accident of Circumstance

Some participants on both sides of the softwood lumber dispute are seemingly struggling to understand basic tenets of supply and demand. A global market is in play in the long run to influence supply and pricing. However, as this Bloomberg report demonstrates, imposition of duties on Canadian softwood lumber is mostly hurting U.S. consumers these days.

This unexpected boon for Canadian lumber producers is essentially an accident of circumstance. The attacks on Canadian lumber exports combined with serious wildfire issues in both Canada and the U.S. have served to reduce lumber supply. Meanwhile, the recent hurricanes that impacted the U.S. have led to a spike in construction – causing lumber demand to soar.

The result of these simultaneous supply/demand pressures has been a sharp surge in lumber prices. According to The Globe & Mail, Canadian softwood lumber producers have seen gains in their share prices of more than 40%. In contrast, U.S. lumber producers are averaging gains of only 10%.

The end result of the latest harassment on Canadian companies is that these companies have become more profitable, while U.S. consumers are paying significantly inflated prices for lumber – even as natural disasters have created an imperative need for new U.S. construction.

– Stockhouse Newswire 09-20-2017

The Art of the Deal

By definition, lumber traders earn their living through negotiation. Most days, the process is more nuanced than “buy low – sell high”!

Trade deals involving negotiation are making news on many fronts these days. Online articles readily offer varying principles, guidelines, and rules for effective negotiation. One such report in the Harvard Business Review offers what the author terms “four ‘golden rules’ to be the most helpful towards productive negotiation outcomes.”

Some have been known to describe successful outcomes around strategy of ‘winning versus losing’, or characterizing established trade deals as “the worst ever”. However, experienced lumber traders know that successful long term customer-supplier relationships, as with international trade deals, are built on effective “win-win” negotiations.

Current NAFTA negotiations are taking shape around what has been described as a list of ‘demands’ from the parties involved. While noises and threats of cancelling NAFTA eminate from some quarters, serious folks tell us to keep focus on the real work of negotiations that recognize there are benefits to be gained for all in working toward effective updating of the deal. Thus the ‘golden rules’ as spelled out in HBR that parallel different stages of a negotiation are interesting to view in the light of negotiations underway on many fronts.

1. The background homework: This serves as a good reminder that any beginning of negotiation calls for need to understand the interests and positions of the other side relative to your own interests and positions.

2. During the process, don’t negotiate against yourself: It’s pointed out that this is especially true if you don’t fully know the position of the other side. This is a recommendation not to give in too early on the points important to you. Wait to better understand which points are more important to the other side.

3. The stalemate: We’re told that there will often come a point in a negotiation where it feels like there is zero room for either side to budge. Both sides are stuck on their position and may have lost sight of the overall goals of the negotiation. If you recognize that you’ve reached this point, see if you can give in to the other side on their issue in exchange for an unrelated point. My Dad relates the story of how my parents negotiated the sale of their first home in Prince George 52 years ago, when a transfer back to Vancouver by his wholesale lumber employer, Ralph S. Plant Ltd, necessitated sale of the home. When negotiations seemingly reached a stalemate over price, Dad recognized that the unfinished basement in the home had been mentioned as one of the sticking points. The prospective buyer, a self-described handyman, was satisfied to point of successful closure on the sale with offer from my Dad to include a trailer of fine Carrier studs, sufficient for completion of the home’s basement.

4.To close or not to close: That is, whether you drive too hard a bargain, cannot reconcile on key terms, or feel that the deal is just too rich for your blood, it’s suggested you “make the offer you want to and let the other side walk if they don’t want it.” This is not to say to be offensive or to low ball, but rather, to be honest, straightforward on what you are willing to do, and explain that you understand if it doesn’t work for them and that it is the best you can do.” No doubt this rule garners respect among all parties involved, including buyers and sellers of wood.

Q&A – Final Five for 2016

Answers to the five remaining questions from the Harderblog Top Ten Questions for 2016:

6. Is oil in the $20’s an inevitable reality?
No. In early January, crude prices had plunged to $34 in the face of oversupply, a level not seen since the early 2000s. But that would turn out to be the low for the year. Most recently, a curtailment deal between OPEC and rival producers was expected to further tighten supply in midst of growing demand.

7. How low can the loonie go?
The low of the year was January 20, when one Canadian Dollar was worth 0.6854 US Dollar.

8. Where will Conifex stock be priced in 12 months?
See TSE:CFF. Conifex Timber Inc. has risen over 30% since December 31, 2015.

9. Is this the year 3-D printers stationed in Fraser Lake begin mass production of 2×10-14’s and 16’s?
While there is little evidence of 3-D printers mass producing 2×10-14’s & 16’s at Fraser Lake this year, there is evidence that technological developments in production of new wood products are making a profound impact on many fronts. The opportunity to spend an afternoon touring the 18-storey mass timber hybrid structure pictured below at UBC was one of the highlights of the year. See High on Wood.

10. Will the Chicago Mercantile Exchange implement circuit-breakers to tame volatility in the lumber futures market?
According to reports that regularly publish updates on lumber futures activity, it’s generally acknowledged that what happens in the lumber market is a microcosm for the entire commodities asset class. However the factors behind volatile changes are felt much more acutely in lumber, than, say, crude oil, because the market/volume is so small. This week we posed Question #10 to Stinson Dean, Broker & Risk Manager at Tall Tree Lumber Company, who confirms volume/open interest is especially low in lumber right now. “Below 4,000 open contracts is very low. Lumber used to have 10,000 in open interest back in 2012-13. When there are limited participants, there are limited sell orders and buy orders. When bullish news is announced, there aren’t enough sellers in the market to absorb an influx of buyers and we get locked limit-up. Buyers are forced to go higher and higher to find sellers.” He adds, “Random Lengths noted that 2014 was one of the least volatile years on record. That’s been followed by two very volatile years. The difference between 2014 and the two most recent years is non-commercial speculator participation. 2014 was a trendless year, 2015 was a bear trend, and 2016 was a bull trend. Funds, in particular, love trends. ‘The trend is your friend’. So, when that group recognizes a trend, they start to pile on. And that starts a chain reaction.” According to Stinson, the funds are out of the market right now; it’s anticipated they will step back in long in the new year.

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Sizzle and Pop

Turns out prices aren’t set by Random Lengths afterall. Adam Taggart, President of Peak Prosperity, explains that prices are actually determined by two things: the upper limit that the marginal buyer is willing to pay, and how intensely the competition from other buyers pushes him towards that limit. Taggart tells us that this basic economic principle that prices are set at the margin, “is just as true for stocks and housing as it is for fine art,” adding: “Most of us don’t really think about the marginal buyer much, but he (or she) is very important. The marginal buyer can evaporate faster than you think. That is the nature of an asset bubble’s unavoidable destiny to pop.”

So what happens when the “current” marginal buyer of an asset disappears? “Prices must fall to become affordable to the next marginal buyer,” confirms Taggart. The example he cites hits home. He submits the marginal buyer of Metro Vancouver real estate has vaporized since the provincial government’s August 2nd passage of the 15% foreign buyer tax.  His expert analysis makes for an interesting read, here.

 

Wall Street Farm Animals?

When a truckload of pigs going to slaughter rolled over this morning in Burlington, Ontario, it’s reported the surviving swines sprung to their hooves and made their getaway. Freedom! We’ve since learned that all that futures bacon has been corralled. The Great Escape was foiled. Bummer. It’s certainly a reminder there’s no underestimating the relative value pigs bring to the table when it comes to serving up a good breakfast. The chicken makes a significant contribution, but the pig makes the real commitment.

Making Trade Great Again?

Amid revved-up rhetoric of U.S. election season comes more news from the U.S. Lumber Coalition that hints of negotiation strategies for any SLA down the road. A press release from the coalition yesterday suggests a hybrid of quota and export taxes, arguing that any deal with Canada must:

  • maintain Canadian exports at or below an agreed U.S. market share
  • establish border measures that are effective in all market situations.

A July 17th industry update from CIBC Institutional Equity Research projected that “the next SLA will resemble the structure Canada proposed to the United States on June 21, 2016, with Option A (B.C./Alberta) duties ranging up to 25% (vs. the 2006 SLA’s maximum of 15%), and lower U.S. market share constraints for Canadian mills.”

Further to CIBC’s May 16th update projecting preliminary duties as early as Feb/Mar 2017, CIBC explains lumber equities trading today around three-year lows “the market pricing in a long multi-year trade battle with very limited pass-through of the cost of duties to consumers.”

Here in B.C., it’s reported the volume of softwood lumber shipped to the U.S.through May 31st ballooned +36% YTD. Some might be wondering what role any consideration for reducing production might have in B.C. mills’ stance /position going forward toward resolution of softwood trade with the U.S. The CIBC report does state that “a period of duties in 2017 could accelerate permanent beetle-related capacity curtailments slated in B.C. over the next three years.” RBC Capital Markets analyst Paul Quinn has also predicted that any preliminary duties imposed in 2017 would result in a number of mill shutdowns right across Canada.

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Big Tippers

Folklore abounds with stories of Wall Street stock traders and lavish steak dinner lunches. Lumber traders not so much. We’re told that stock traders are sticking closer to their trading desks these days, leaving many of Manhattan’s lunchtime eateries vacant.  Global turbulence in financial markets through the first 60 days of 2016 explains a “re-calibrating” of the Wall Street lunch; the steakhouse slowdown coincided with the S&P 500’s worst-ever start to a year. Even so, it’s reported a recent $1,000 lunch tip left by one regular suggests there are still a few traders seemingly immune to the market’s ups and downs.

In midst of a year without export tax winter, no doubt lumber traders are also spending more noon hours at their desk. Unlike this time last year, when one of the harshest winters on record stifled demand, lumber is even hotter than the weather. It’s reported here that lumber futures is up 22% this month, outperforming stocks, oil, and gold. Out in the field, Random Lengths confirms “producers have kept order files advancing deeper into April” on #2&Btr Western SPF and “moved prices up accordingly”. At the secondary level meanwhile, at least one trader/blogger has characterized activity over the past ten days as “the quietest hot lumber market” in recent memory. With the BC Wildfire Service having just announced early burning restrictions due to dry conditions in the Cariboo, traders will be closely monitoring the day-to-day changing landscape – mostly from their desks.

“There’s nothing like a little bit of a sharp correction to improve our work ethic.”
– John Manley, New York-based chief equity strategist at Wells Fargo Funds Management, which oversees about $233 billion.

wolf of wall street

Lunch scene from “The Wolf of Wall Street”

 

~Musical Refreshment~

I recently finished recording sax tracks on two more original compositions by Dave Friend for our Funkify album.


Searching for Lumber Man

Volatility that characterizes global financial market activity seems less pronounced in North American lumber markets these days. While winter weather contributes to a pause this week in especially Northeastern jobsite activity, there is evidence of general price support as reflected in mill order files. Despite unseasonably active markets, the Framing Lumber Composite Price has drifted sideways since the October 12th expiry of the SLA ($311 Oct 13 vs $313 today). A weak Canadian dollar has so far helped keep a lid on significant US price increases.  Dealer hand-to-mouth buying patterns and pressure on timely deliveries also suggest the memory of last year’s market collapse still lingers.

~~

In keeping with the preservation of old growth timber these days, now comes word Random Lengths is searching for the industry’s oldest active lumber trader. According to Random Lengths, candidates “must work full time in the U.S. or Canada, and spend at least half their time buying and/or selling lumber or panels”. It’s been suggested that at minimum, applicants should demonstrate a vague recollection of their last sale and/or purchase.

baby boomer cartoon