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.

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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

Ten Questions for 2016

Here are ten questions that Harderblog will be watching in 2016, in search of answers:

    1. Will the Trump presidential campaign have staying power beyond March?
    2. Will the U.S. make history by electing a woman as president for the first time?
    3. Will B.C. softwood log exports to Mainland China eclipse B.C. softwood lumber exports?
    4. Will a new Softwood Lumber Agreement be reached between Canada and the United States before the standstill period ends Oct 13, 2016?
    5. Is this the year Virtual Reality goes mainstream?
    6. Is oil in the $20’s an inevitable reality?
    7. How low can the loonie go?
    8. Where will Conifex stock be priced in 12 months?
    9. Is this the year 3-D printers stationed in Fraser Lake begin mass production of 2×10-14’s and 16’s?
    10. Will the Chicago Mercantile Exchange implement circuit-breakers to tame volatility in the lumber futures market?

Answers 1-5

Answers 6-10

 

Q&A – Final Five for 2015

Answers to the five remaining questions from the Harderblog Top 15 Questions for 2015:

5. Who will be the first lumber producer to establish a reload in Cuba?
Hasn’t happened yet.

8. Will US politics figure dominantly in lumber trade with Canada in 2015?
In one of our most popular posts of the year, Ben Gann, Vice President Legislative Affairs and Political Affairs, National Lumber and Building Material Dealers Association in Washington, DC. confirmed that electoral politics of both countries figured dominantly in lumber trade in 2015. “It is unlikely that we will see a new (softwood lumber) agreement until next fall at the earliest, but probably not even then,” projected Gann, back in September. “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.” See Double Whammy.

9. Will rail rates increase to offset any reduction in fuel surcharges?
No – in fact rail rates decreased slightly over the course of the year ($2-3/M).

10. How will the exponential growth in computer power impact our business in the next 12 months?
The very thesis of exponential growth in computer power is acknowledged to have limits. Says physicist Kaku here, “.. there is an ultimate limit set by the laws of thermal dynamics and set by the laws of quantum mechanics as to how much computing power you can do with silicon. That’s the reason why the age of silicon will eventually come to a close,” arguing that Moore’s Law could “flatten out completely” by 2022. Where do we go once Gordon Moore’s axiom runs out of steam? Kaku hypothesizes several options: protein computers, DNA computers, optical computers, quantum computers and molecular computers. And then he makes a bet: “If I were to put money on the table I would say that in the next ten years as Moore’s Law slows down, we will tweak it. We will tweak it with three-dimensional chips, maybe optical chips, tweak it with known technology pushing the limits, squeezing what we can.”

13. Where will Interfor stock be priced in 12 months?
At time of posting, Interfor stock is at $13.76, down over 40% from $23.34 peak (Feb 20, 2015).

Oil and Housing

On December 30, 2014 we asked Will $55 oil help or hinder housing starts next year? The answer may not be entirely clear on this as year-end activity in the U.S. in particular finds lumber market activity brisk with upbeat November housing reports. Builders are reportedly stepping up home construction broadly across the U.S., suggesting the housing market will help anchor the economy amid global turbulence and projected four more interest rate hikes next year. So far the winter weather that has known to shut down building, in the lead-up to Christmas in past seasons, has not played a large part. Builders broke ground on 1.173 million units, when calculated at a yearly rate, in November, up 10.5% from a month earlier, the Commerce Department said Wednesday. Construction climbed at roughly the same pace in the first 11 months of the year compared with the same period in 2014.   

Q&A

A pair of Harderblog questions for 2015 were answered this week:

Will Canadian household debt levels eclipse 170% of disposable income?
The answer came from Statistics Canada this week with the announcement that household debt compared with disposable income rose to 163.7 per cent in Q3, up from 162.7 per cent in the second quarter. In his Vancouver Sun column this week, Craig Wong reaffirmed earlier reports that household debt and Canadian housing market imbalances have been key concerns for economists and policy-makers. Interesting to note that while Canadian consumer debt levels in relation to disposable income have been increasing at what many economists consider to be a dangerous and alarming rate,  U.S. patterns of household debt to GDP ratios at end of second quarter of 2015 were reported to be at 79.76 per cent.

Will the long-talked about ‘normalization’ of interest rates materialize in 2015?
It’s a tale of two economies. In the U.S., where household debt is falling and consumer confidence is rising, the Fed raised rates this week above their near-zero threshold for the first time since 2008. In Canada, we were told last week the BOC would consider pushing interest rates as much as a half percentage point into negative territory in the event of a crisis.

MORTGAGE-DEBT (1)

HT: The Greater Fool Blog

Lumber Markets and Terrorism

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.

Summer Smoke

We might have been hoping that summer lumber markets would be smoking by now. But the smoke that’s been hanging around Metro Vancouver is not what anyone expected. When folks at Whistler this week compare air intake to atmospheric conditions in Beijing, it’s serious. What’s shaping up to be the worst wildfire season on record in many parts of western Canada could significantly impact seasonal activity in the woods yet to be determined. But foreseeing the impact of the many variables at play in shaping this summer’s lumber markets is being clouded by more than the smoke and mirrors that might normally have a role in market forecasts.

In the face of China’s plunging financial markets comes reports of their oversupplied lumber inventories. At the same time, hand-to-mouth buying patterns evident in North American markets suggest lingering effects and challenges in playing catch-up after an unusually harsh winter. Meanwhile attractive exchange rates are offset by a 15% export charge on B.C. softwood shipments south of the border in July; questions abound over the impact of a 5% export charge for August. Speaking of the Softwood Lumber Agreement, traders also eye the October expiration date and what’s anticipated to be a one-year, cross-border fibre free-for-all.

There’s also talk of federal elections in Canada on the horizon at the same time as more economic analysts suggest we could be teetering toward recession. Will the Bank of Canada cut rates yet again one week from today? Bulldozers in neighbourhoods across the Lower Mainland can’t wait. Hardly noticed in the mix of news are “secret” reports that free trade of B.C. logs is reportedly the “preferred policy from a global perspective”. Imagine that. Despite the saying that “a summer’s sun is worth the having”, too much of it carries risks of its own – beyond smoke in our eyes.

IMG_1357 (2)

“Smoky Sundown” – Stanley Park (7 July 2015)

When life gives you lemons..

When my aunt and uncle presented a box loaded with the biggest, freshest lemons – straight from their own California backyard – the path was clear. Our three and five-year old daughters helped with the squeezing before making their own sign and setting up shop this past sunny Saturday at the edge of Vancouver’s 14-mile long seawall. Turns out they also experienced the Seven Business Lessons from a Lemonade Stand:

  1. Deliver the best product you can – fresh lemonade from hand-picked lemons in pitchers packed with crushed ice – check!
  2. Location, Location, Location – high traffic seawall entry/exit on our doorstep at Quayside Marina – check!
  3. Brand extensions can kill your brand – seemingly an effort to build on her lemonade success, our five-year old’s lettuce offerings from the terrace garden may have confused customers, perhaps diluting the brand
  4. Develop an integrated marketing plan – “Lemonade for sale!” “Lemonade for sale!” – (and again?!)
  5. Humanize your business – watching your two toddlers sit silently after pouring a 25-cent cup of lemonade while customer awaits change on their ten dollar bill – priceless!
  6. Speak the language of your customers – kids connecting with kids.. and parents in tow
  7. Have an exit strategy – remarkable patience and enthusiasm (if only Daddy hadn’t closed the stand for dinner..).

lemonade for sale

Shy Lumber Stock Investors

In describing today’s over-supply of softwood lumber, attendees at the NAWLA Regional Meeting in Vancouver will recall Peter Woodbridge’s super-saturated chemistry analogy. Expanding on the theme this week at Business Vancouver, Woodbridge now likens investors in lumber stocks to “the parents of a super-star high school student who inexplicably is at risk of not graduating.” It’s an edgy article aimed at investors that’s worth reading here. Highlighted points include:

  • “In explaining why lumber stock prices have fallen so quickly recently, it’s clear that Canadian lumber supply is the villain in the story. Unlike the pulp industry, which practises supply management, B.C. lumber producers prefer to keep their mills operating at high rates – even when demand softens, as it has at the moment.”
  • “They have been aided and abetted by the declining value of the Canadian dollar in U.S. funds. Softwood lumber is sold in U.S. dollars. So B.C.’s mills shipping to the U.S. recently have made a windfall gain of around 20% on their export sales.”
  •  “Supply management exists in the lumber industry, but it’s imposed on Canada by the Americans, who want to protect their less efficient, domestically owned sawmills. The 2006 Softwood Lumber Agreement is expiring in October and might be replaced by something more onerous.”
  •  “Asia – China in particular – is chronically short of commercial timber and wood fibre.”
  •  “..for softwood lumber prices to rise meaningfully, Canada’s lumber industry will have to reduce its current overproduction.”

Super Stuff

In 2010 and 2011, attendance at the NAWLA Vancouver Regional Meeting averaged 150. In 2012, there were 170 registered attendees. April 2nd marked the third consecutive year that attendance has blown past 200 in a packed Grand Ballroom at The Vancouver Club. During the evening networking session, many attendees remarked how much they enjoyed the diverse themes offered up by our professional presenters at the afternoon meeting: Bob Lenarduzzi (Vancouver Whitecaps FC), Peter Woodbridge and Kim Marshall (Woodbridge Associates), and Gavin Dew (Trans Mountain Expansion Project).

Of note, forest industry and wood product consultants Peter Woodbridge and Kim Marshall left attendees buzzing about their “Super-Saturated” chemistry analogy to describe present market conditions. According to Woodbridge Associates, there are seven factors fueling today’s over-supply of softwood lumber:

  1. China Lumber Supply, diverted to the U.S. market
  2. China/Asia Log Supply, diverted (in part) to the U.S. market
  3. Currency-Fueled SPF lumber (C$), muting the intended impacts of Softwood Lumber Agreement (SLA) supply management
  4. Currency-Fueled Euro Lumber (Eu) diverted from the MENA market
  5. Currency-Fueled Russian Logs/Lumber (RUB), selling into Asia/Europe
  6. Low Tax-Rated Canadian public timber, partially offsetting rapidly rising structural wood costs in many parts of Canada
  7. ‘Coming of Age’ of U.S. South Southern Yellow Pine industry, as dominant supply region and price setter. 87% of 2014 production growth = U.S. Mills.

Woodbridge suggested “Super-Saturated Supply” will continue to dominate lumber markets and ‘hold-down’ lumber prices this year. And while too early to declare a trend in critical Texas, they cited Q1 warning signals in lumber demand, ripple effects from the oil price collapse. Their in-depth analysis charting multi-family vs single family home building, particularly in the South, was eye-catching.

At the same time, Woodbridge cautioned that Super-Saturated Supply is temporary, confirming predicted lumber super cycle fundamentals are “alive and well”; super cycle timing has simply been “pushed forward”. Also of note, in Woodbridge’s view, the SLA will be renewed (October 2015), but with a ‘kicker’ in the form of a ‘re-calibration’ which will be priced into Canadian SPF from 2016 onwards.