With the expiration of the Canada-U.S. Softwood Lumber Agreement (SLA) this October, a minor slip in Canadian housing starts and the sudden scarcity of top selling species recently, the local lumber market entered a period of uncertainty this fall.
Some lumber producers and distributors, however, chose to focus on the brighter side of the story.
“A lot of manufacturers and distributors are not sure how a new SLA will turn out for them,” according to John Taylor, AFA Products Inc. branch manager in Ontario. “However, with the expired agreement companies are shipping their lumber south of the border like crazy and taking advantage of the absence of duties that may last for a year.”
This is good news for businesses selling to the U.S. but unfortunately, this has resulted in a shortage and higher prices for certain products in Canada.
Canadian companies refused to let these developments dampen their mood and instead reported that they are looking to potential growth opportunities in 2016.
Consider the view of Paul Sheasgreen, the British Columbia-based national lumber procurement manager of CanWel Building Materials.
“The softwood lumber agreement provided some level of comfort with regards to the mechanics and market reaction,” he said. “Now, the industry will likely have no agreement in place until the end of next year…there will definitely be some volatility.”
While there may be “a bit of a panic,” the expiration of the SLA may be an opportunity for CanWel to fine-tune its strategy, he said.
Mixed Outlook
Material costs for Canadian lumber companies are expected to go up by 8.7% by the end of 2015, according to the Conference Board of Canada (CBC), but it also foresees the local wood industry benefiting from the weaker Canadian dollar and the ongoing recovery in the U.S. housing market.
Cost increases that exceed revenue growth will push down pre-tax profits to 0.2% or $1.4 billion in 2015. However, rising production and higher prices mean industry revenues are set to reach nearly $29 billion for 2016.
“The continued recovery in the U.S. housing market is supporting increased demand for Canadian wood products, leading to an 8.7% increase in export volumes,” Michael Burt, director of industry economic trends at the CBC, said in a recent statement. “However, while production should remain strong over the next five years, growth is set to eventually slow due to timber shortage in B.C. and soft growth in demand from China.”
While increased production is in the forecast, Burt also warned of risk factors that threaten the local industry in the medium term such as timber supply constraints brought about by a mountain pine beetle infestation in B.C. He said these could cause some companies to close their plants.
Under Pressure
Supply appears to be the top concern of Canadian lumber distributors. For instance, the price of 2” x 4” random wood lengths in Eastern Canada has gone up from $4.20/bf just one week after the SLA expired, according to Taylor. It has become harder to locate cedar and SPF (spruce, pine and fir) as well.
“OSB (oriented strand board) is almost hard to find and prices shot up from $200/1,000sf to $300/1,000sf in the past four weeks,” reported Taylor. The SPF shortage could be traced to lumber demand in the U.S., said Sheasgreen.
“Supply has become tighter because mills in the west are moving away from SPF and producing hemlock and fir instead which are in demand in the U.S.,” he said.
Exports to Asia are likely causing an impact as well. Over 90% of log exports to Asia for the last five years have been from Western Canada. For example, log shipment from B.C. to China rose from 100,000 cmb in 2007 to 3.4 million cmb in 2014.
Logistics is another industry sore spot, according to Michael Sivucha, Vice President of commodity supply for Taiga, since there is currently a truck driver shortage disrupting the supply chain for example.
“Other potential constraints to growth include credit and skilled workers,” Sivucha added. “Demand could outstrip the ability of both to keep up.”
US Demand Continues to Shape Market
With the expired SLA, 2016 is going to be a “potential free trade on lumber,” according to Sivucha.
“The exchange rate and weaker Canadian dollar has the largest impact on lumber and OSB where a lot of cross-border trade exists,” he said. “Americans will continue to have greater purchasing power than Canadian buyers. As a result, the U.S. will set the tone for commodity pricing going forward in 2016 and beyond.”
The recovering American housing market and relatively flat Canadian housing starts also mean that the U.S. market for wood products will drive demand and pricing for wood products.
“Due to higher pricing and improving demand, Canadian manufacturers will see greater revenue,” said Sivucha. “This could also translate into greater revenue for the likes of Taiga which sells OSB, plywood and lumber.”
Opportunities and Innovation
While some Canadian businesses have taken a “wait and see” position, others like CanWel are looking to turn the situation to their advantage.
“We are focusing more on larger contract business rather than spot business,” said Sheasgreen. “From a procurement standpoint there is less volatility when volume and price are set for the year.”
He also said CanWel is taking note of what appears to be a shift in customer preference from commodity lumber to more expensive, high-end “appearance wood products.”
Other opportunities are also opening up for the local lumber industry, said Steven Street, technical adviser for Wood Works. Wood Works is a program of the Canadian Wood Council that is focused on increasing the use of wood in commercial and institutional construction.
In January this year, changes to the Ontario Building Code allowed the use of wood- frame for six-storey buildings. Previously wood frames were only in one to four-storey buildings.
Quebec gave builders a similar green light last year while British Columbia changed its building code to allow six-storey wood frame buildings back in 2009.
The movement is a game changer, according to Street.
For builders, especially those focusing on small-scale condos and low-rise office buildings, it means substantial savings because wood costs as much as 20% less than other construction materials such as steel and concrete.
For lumber manufacturers, it means a boost to a struggling industry. In Ontario alone, 60 lumber mills have closed down and 45,000 jobs were lost during the last decade.
Wood frames will eventually find their way into higher buildings, said Street. For example, cross-laminated timber (CLT) is going to be used along with concrete and steel in the construction of a 13-storey building in Quebec in the spring of 2016.
The University of British Columbia has also approved the construction of an 18-storey student residential tower made out of CLT, Glulam and nail laminated timber (NLT). The first floor of the building will be concrete, but the other 17 floors of the $51.5 million project will be built with wood. “Wood manufacturers should keep a close watch on these two projects and the amount of traction they will generate,” said Street.
While the sales of dimensional lumber remain strong, the use of engineered wood in hybrid projects like these will be an indicator of what types of wood products they should focus on in the near future, he added.
“The outlook for the future is brighter than it has ever been in years,” said Street.
