Sawmill margins getting squeezed

A recent press release announced the closing of a Canadian sawmill.  See “Tembec suspends operations at its sawmill in Cenneterre, Quebec for an indefinite period.”   In January, another sawmill closure was announced in California “Sierra Pacific Announces Permanent Closure of Arcata Sawmill; More than 100 Jobs Lost”.   One needs to bear in mind that like in any industry, there are factories closing all the time.  It’s the nature of economics.   However, the current market condition is not favorable to many sawmills in North America.   The price for sawn lumber is down because demand is down, yet the raw material costs are not changing.  This is going to squeeze profit margins. So we would not be surprised to see more closure announcements in the coming months.

The reason for the low prices is that demand has now dropped below supply.   While one might expect to see a surplus of lumber across the country, the odd twist to this situation is that we may actually see an acute shortage in several months.  Most lumber yards have been keeping inventories under control, so the lead time from being over stocked to “out of material” is pretty short.

The two largest factors in the demand on wood are the US housing starts and exports to China.  China is the largest importer of forest products in the world.

The wood market can be characterized by three graphs.

  1. The historical price of wood
  2. New housing starts
  3. Imports to china

The historical price of wood

lumberpricesoverlast10years
Source http://www.nasdaq.com/markets/lumber.aspx

One can see from this graph that the price of wood tumbled along with just about everything else in  2006 when the housing market started to crash and ignited one of the deepest and longest recessions in modern US times.   The prices hit bottom in 2009 and started to recover until sometime in late 2014 where they started to fall and declined through 2015.

New Housing Starts

Below is a chart showing single unit housing permits per year.  Single unit houses use a higher percentage of wood than multi-unit housing.

ushousingpermitsbyyear

One can see that the number of housing starts declined from 2006 to 2011 and started to recover a bit in 2012 and 2013, however 2014 and 2015 have had minimal growth.  After some high expectations, 2014 was a very disappointing year for housing starts.  2015 increased, but the level of housing starts is still less than half of what it was in 2004.

The graph below shows wood imports to China

chinaimportofwook
Source: tradingeconomics.com

One can see from the graph that China has been steadily (and significantly) increasing wood imports from the US with the increase starting in 2009 and apparently peaking in mid-2014, with declining in 2015.  The Chinese economy has slowed and as a result the demand for wood has slowed.

In short the Chinese economic slowdown combined with weak US housing starts have created a wood surplus and caused prices to drop.  While one might think that consumers should be benefiting from an oversupply in the next few months, many are warning of another shortage.  In fact some experts are predicting wood prices to hit record levels in 2017. Source.   The demand slump is considered a short term issue, but there are long term supply problems and if more sawmills close, the issue could accelerate.

Packnet has always kept a close eye on supply issues for both wood and plastics used in packaging materials.   While it is not always possible to predict or react to a very volatile market, we try to make purchasing decisions that help us provide the best situation for our customers.