Amid the uncertainty of all that’s shaping lumber markets these days, today recall Forest Economic Advisors (FEA) analyst Paul Jannke’s presentation at the LMC Expo in Philadelphia back in November. Toward the end of his decidedly bearish forecast for 2016, Jannke described home sales data as the key stat to watch when gauging future homebuilding activity. Today, we learned U.S. single-family home sales surged almost 11% in December. According to CNBC, it’s “the latest indication that the housing sector remains on firmer footing despite a massive stock market sell-off and slowing economic growth.”
There are many ‘beginning-of-the-year’ tunes or phrases aimed at setting before us the opportunities offered up in a clean New Year sheet. “Getting started is half the task.” “Enjoy the journey.” Even so, this January is a riddle. A year ago, January offered up record snow falls that shut down lumber markets. This year the early weather patterns, while confusing as usual, have largely been hospitable for winter construction activity in most regions of the continent.
(Addendum – 1/25: Notwithstanding the giant snowstorm over the weekend which blanketed much of the Northeast…the weather through January was generally hospitable for winter construction in most of the continent)
All fine and good until we acknowledge that our lumber markets are now, more than ever, global. A sudden awareness that China’s declared objectives of switching from a manufacturing economy to a consumer/services economy is impacting negatively on BC’s largest producers’ projections for unabated growth of softwood lumber exports to China. Add in the record lows for oil and it all makes for ‘loonie’ tune forecasts in lumber markets, whatever jurisdiction the focus.
B.C. softwood lumber exports to Mainland China (Source: B.C. Stats)
-18.1% in June 2015 YOY
-19.5% in July
-42.3% in August
-55.5% in September
-48.6% in October
-25.3% in November
Time to answer Question Number 7 for 2015: Is information technology rendering lumber traders obsolete?
While it seems reasonable to surmise the pool of lumber traders is getting smaller (consolidations in North America, vanishing lumber agents in China), information technology is not rendering lumber traders obsolete. It would seem that there are intangibles traders bring to the marketing function in the lumber business that, and we might have to agree with Donald Trump here, will always be necessary to fashion an effective deal! In fact the challenge of interpreting change in prevailing market uncertainties is probably greater than ever. Change no doubt calls for ever-shifting adjustments and demands of accommodation which of itself might be said to enhance the opportunities that a good lumber trader offers in today’s lumber market environment.
~Dak the Halls~
First United Church doubles as Vancouver’s Downtown Eastside (DTES) homeless shelter. A recent visit in support of First United, one of several Dakeryn charities (including Downtown Eastside Neighbourhood House, North Shore Crisis Services Society) brought home the realities of daily challenges many on the margins of society face. I had the opportunity this past Sunday morning to listen to Reverend Sally McShane, the minister at First United. Her reflection on recurrent theme that “we are possibility” reinforced an awareness of our own privilege and “possibilities” to make a difference in the lives of the less fortunate.
What role, if any, will social media play in lumber distribution? The answer to Question #3 for 2015 is provided in this informative webinar for homebuilders hosted by Weyerhauser. In the webinar, Mollie Elkman at Group Two Advertising tells us, “In our industry, social media is no longer a secondary marketing medium. In today’s world, it has to be a cohesive part of your overall marketing plan. Media isn’t evolving, it hasn’t evolved – it’s 100% changed”.
In this post we referred to a survey which found 80% of lumber and building material distributors and retailers have a presence on social media. While the acknowledged challenge continues to be defining social media’s practical value to business, some might argue that “proving ROI” is a tired excuse for not committing the significant time and resources required to do it well. Clearly the intangibles are enough reason to engage. “Social media immediately breaks down that barrier between personal relationships and business relationships,” says Elkman.
Much has been written about social media “best practices”. For best practices in our industry, I recommend checking out Canfor on Twitter here. Also, the meaningful content at Weyerhauser’s blog section here is an excellent example of “posting with a purpose”. Of course blogging is merely one social platform. In the past almost five years at Harderblog, it has certainly opened many doors to expanded relationships directly and indirectly associated with lumber.
“I often hear ‘this isn’t the right medium for our buyer’ and I have to call BS on that one because it is the right medium for every buyer. It’s how you use the medium. If it’s not working for you it means you’re not using it the right way.”
– Mollie Elkman, President, Group Two Advertising
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.
My takeaways from industry connections at the lively LMC Expo in Philadelphia last week suggest year end reviews from analysts point to a mixed outlook for 2016.
Analyst Paul Jannke, Principal of Forest Economic Advisors (FEA) presented at Friday’s breakfast session. I arrived early, having heard Jannke speak back in 2012 at the NAWLA Regional Meeting in Vancouver. A bull in a Bruins jersey back then (see post here), his presentation was decidedly more bearish on Friday. The four factors explaining this year’s lumber price collapse were familiar (lower than forecast U.S. housing starts, lower export volumes to China, rising production capacity, foreign exchange rates). Of greater interest were the reasons why FEA projects that “markets will likely remain weak through next year”:
- Mills are anticipating higher levels of consumption (“investing in efficiency”)
- U.S. dollar to remain strong
- Domestic consumption growth will be slow
- Exports to China will continue to be weak
- Entering a period of seasonal weakness
- Expiration of the SLA.
At the same time, Jannke cited a number of reasons suggesting minimal downside risk (“the longer the time horizon the better we feel”):
- Near cost of production for Western SPF
- Dealer inventories are low
- Limits to Russia’s ability to supply China
- Consumption will increase
- BC will see supply limitations
- Mills will be more cautious with their planning.
When gauging homebuilding activity (FEA forecasts 1.26 million U.S. housing starts in 2016), Jannke said that sales data is the key stat to watch going forward (“new home sales are presently consistent with just over one million starts”).
Later that morning, I appreciated the opportunity to speak with Jannke at our Dakeryn table on the exhibit floor. It was interesting to hear him say that lumber market conditions might play a role in the timing of any cross-border trade negotiations (“to help in proving injury”). When I asked how Canadian sawmill expansion in the Southeastern U.S. might play into those negotiations, Jannke downplayed the impact while noting that members of the U.S. Coalition for Fair Lumber Imports include a number of private timber owners. I also asked how so many forest analysts “got it wrong” in their 2015 forecasts for significantly higher lumber prices. Jannke said that while he couldn’t speak for other analysts, FEA had one of the more tempered price forecasts this year ($300-320/M).
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.”
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.
As Labor Day approaches, conflicting reports continue to dominate lumber markets. Today, traders are eyeing with interest Canadian lumber production numbers for June – up almost 11% compared to June 2014:
Lumber production by sawmills increased 5.5% from May to 5 618.5 thousand cubic metres in June. Compared with June 2014, lumber production rose 10.9%.
Sawmills shipped 5 804.7 thousand cubic metres of lumber in June, up 6.3% from May. Compared with June 2014, shipments rose 6.4%.
– Statistics Canada here
This chart would seem to be symptomatic of so much of what’s happening these days. Since peaking in early July, the Random Lengths Framing Lumber Composite Price has fallen $40.