After the currency-driven global lumber price slump in 2015, market demand and prices both started to improve in 2016. While overall global demand improved modestly in 2017 – at only half the rate of 2016 – it has been supply disruptions and changing dynamics that created a wild and unpredictable market that surpassed everyone’s expectations.

All markets appeared to be at least good to strong in 2017; this included the U.S., Canada, most of Europe, Japan, China and much of Asia. Only one market region remained unsettled again: the Middle East/North Africa (MENA) ­– Egypt and Algeria, specifically, along with some areas of the Middle East. The U.S. was a solid growth market again in 2017 (the case since 2010), but supply dislocations (forest fires, hurricanes, etc.) and other developments resulted in surging prices throughout the year.

As usual, there are always various change factors at work that can directly or indirectly lead to unpredictable swings in lumber supply, demand and prices, and this was especially the case in 2017. One of the largest market variables in 2017 was the initiation of import duties on Canadian lumber shipments to the U.S. (announced in late April and including retroactive duties back to late January 2017). These duties were expected to cause huge disruptions and volatility, and certainly did so as Canadian exporters successfully pushed up U.S. market prices to cover all of the import duties. The following excerpts from WOOD MARKETS 2018: The Five-Year Solid Wood Products Outlook 2018-2022 address some of the important North America lumber market changes anticipated over the next two years.

North American demand
Both the U.S. economy and housing starts continue to improve, although at a stubbornly slow pace. The official unemployment rate is now down to almost four per cent (but the effective level is considered much higher), while home foreclosures are much closer to historical rates than ever – all good news. New residential housing (the key driver of North American lumber consumption) remains on a slow but steady upward trajectory and should reach between 1.20-1.22 million units in 2017. Stocks of both new and existing homes have retreated to historical levels, but prices for new homes continue to move up in many markets (and in some cases are higher than those seen before the 2006 crash). With a shortage of building lots and workers, as well as strong credit ratings required for new-home purchases, a number of factors have contributed to a tight housing inventory, fostering price increases. The five-year WOOD MARKETS 2018 housing forecast is still very conservative, and we do not foresee U.S. housing starts reaching 1.5 million units until 2022 at the earliest. Even with a slow rate of growth in U.S. housing starts in 2017 and given what is expected from 2018 to 2022, supply-side impacts have already led to some major imbalances; overall demand and market activity is anticipated to remain active and volatile again in 2018 and beyond.

US import duties
One of the biggest factors impacting lumber markets in 2017 in North America was the implementation of U.S. import duties on Canadian lumber shipments. This included both the preliminary countervailing duty (CVD) of 19.88 per cent (“all others” rate) and anti-dumping (ADD) duties of 6.87 per cent (also determined to be retroactive for 90 days upon their announcement). The reaction of Canadian exporters was to raise prices just prior to the date retroactive CVD duties might be expected to commence (late January 2017, according to the schedule). Markets were jolted by this non-market force, and that created huge uncertainty in the early part of the year. The lumber price increases proposed by Canadian exporters were largely accepted, and most (if not all) of the duties were passed on to U.S. buyers during the year.

As part of the U.S. trade law process, the Department of Commerce ruled in November 2017 that total CVD/ADD duties of 20.83 per cent were to be levied on Canadian lumber imports. The U.S. International Trade Commission (ITC) upheld this decision in early December, ruling that the U.S. lumber industry was injured by Canadian lumber imports. The ITC submitted its decision back to Commerce by Dec. 22, and final duties were implemented as of Dec. 28 when the CVD/ADD order was published in the Federal Register. Some “ministerial error” corrections were applied to the AD rate for Canfor and the CV rate for West Fraser (to correct mathematical errors in the calculations). The final rates, including the total “all others” rate (which drops to 20.23 per cent from 20.83 per cent) are shown in table 1.

As in previous trade disputes, Canada has already announced its plans to appeal the CV/AD duties before NAFTA and World Trade Organization panels.

North American supply
North American production continued to expand in 2017 (as it has since 2009) as a result of slowly growing demand in U.S. housing and all other end-use segments. Higher prices in the U.S. market limited exports for both U.S. and Canadian companies, and this led to the fourth consecutive year of declining net trade (from 10.2 billion bf in 2013 to 6.2 billion bf in 2017). Reduced exports and rising output from North American mills meant more shipments directed at the U.S.; there was also another significant increase in offshore imports to the U.S. market. With 45 plus Canadian-owned mills situated in the U.S., and given the Canadian import duties and stronger prices in 2017, a flurry of capex projects to expand existing capacity is combining with more announcements of greenfield/brownfield mill projects to add incremental lumber output (almost all of these are in the U.S. South).

Canadian lumber production, which has continued to rise from its bottom in 2009, should reach 28.2 billion bf in 2017; however, this will represent a decline of about 300 million bf from 2016, well below the 2004 peak of 35.2 billion bf. Lumber output from the B.C. Interior was flat between 2011 and 2014 and then peaked in 2016 at 12.1 billion bf. With the implementation of U.S. import duties starting in late January of 2017, lumber prices were raised to cover the duties and stayed high, exacerbated by severe forest fires that crippled logging and sawmilling operations over a two-month period. Interior B.C. lumber output is likely to decrease somewhat in 2018, but this will depend on the declines in log supply (including the economic viability of processing dead pine timber) and lumber prices. It is still expected that as many as three to five sawmills will close in the B.C. Interior by 2025, but the timing is unknown. Lumber exports to Asia may grow, but volume gains are expected to be small if they occur at all given softer market demand in Japan in 2018 and lower prices in China (versus the U.S.).

Eastern Canada (Ontario and Quebec) also continues to face longer-term timber supply issues as a result of legislated reductions in harvesting limits (annual allowable cuts) on government lands. In addition, the closure of several pulp and newsprint mills (with additional shuts expected) has negatively impacted chip prices in some regions. However, lumber production continues to rebound in Eastern Canada from the lows of 2009. In fact, during the last few years, North America’s largest percentage increases have been achieved in this region, simply because this was the last area in North America to restart curtailed sawmills; Ontario, for example, is estimated to have grown its production by 20 per cent in 2017 (although output will still be more than 30 per cent below 2005 levels).

Eastern lumber output (including in the Atlantic provinces) should grow by almost four per cent in 2017 as a result of favourable U.S. market prices and strong demand in Canada. In 2018-19, these levels should remain relatively unchanged from 2017 levels as the bite is felt from U.S. import duties (except in Nova Scotia) and lower Canadian housing starts.

Canadian exports to the U.S. soared to over 15 billion bf in 2016 but will slow to about 14.1 billion bf in 2017, due partially to supply disruptions in the year and partially to import duties. Depending on a number of factors – including the trends in U.S. lumber prices – it is expected that Canadian exports to the U.S. will drop further in 2018 and probably move even lower again in 2019. This reduction will occur even though U.S. housing starts continue to rise (albeit slowly), and the Canadian supply response to import duties will noticeably impact both supply to the U.S. and lumber price volatility.

U.S. West output remained in a narrow range of 13.5-13.9 billion bf between 2013 and 2016, with each region (West Coast, Inland and California Redwood) showing equally flat production trends. With reduced Canadian imports to the U.S. in 2017 as a result of import duties, U.S. West lumber production is forecasted to rise by about three per cent in 2017 and over six per cent in 2018, and perhaps increase another six per cent in 2019. This is an aggressive forecast, and it is subject to both log availability and suitable pricing.
2018 Lumber Outlook Andrew Goto
U.S. South lumber output will continue to expand, and could increase by over six per cent in 2018 from ~18.3 billion bf in 2017 with a further gain of up to eight per cent in 2019 – another aggressive forecast. The U.S. South has large volumes of incremental timber that is now fuelling new sawmill announcements. The South still has some of the lowest delivered log prices, the highest lumber prices, and the best sawmill margins in North America. With restrictive import duties on Canadian lumber now in place, a bet on new mills or expansions in the U.S. South is a good one. However, an increase in sawlog demand will start to move log prices higher, eventually leading to an erosion of the currently stellar sawmill margins.

Offshore imports of structural lumber will play an expanding role over the next five years, with European lumber imports soaring in 2017 due to higher U.S. lumber prices. At mid-December East Coast prices, Scandinavian and German mills will be able to bring in more volume given the high margins. Other European countries will be following if prices hold above US$500/Mbf to the U.S. East Coast region. The duties on Canadian imports have essentially opened the door for all of Europe (and even some Russian supply) over the next five years, an outcome we predicted in last year’s report.

Of the total North American output to 2019, the lion’s share of this increase will need to come from U.S. mills, whose shipments are projected to grow by 15 per cent from 2017 to 2019 (which we view as an aggressive target). Although already limited by tightening timber harvests in the B.C. Interior and Quebec, Canadian shipments are projected to decline by 2.5 per cent in the period 2017-2019, while Canadian exports to the U.S. could slip by seven per cent. The impact of import duties on Canadian lumber exports to the U.S. will make 2018 another very interesting and volatile year!

U.S. demand will be leaning more heavily on expansions in U.S. production and European lumber imports in the 2018-19 period. Production increases in the U.S. will be subject to many factors, including lumber prices, log supply and costs, financing, supply chain dynamics (including loggers and sawmill workers), etc. This means we could see varying supply responses in different regions of the U.S., and at different times.

As we have been forecasting for the last few years (and again this year), there does not seem to be nearly enough available softwood lumber capacity in North America to meet U.S. demand by the end of the decade. While the slower pace of housing starts has somewhat delayed any potential “supply gap” in the last few years, the burden of import duties on Canadian lumber shipments to the U.S. has now exacerbated this situation (starting this year). We predict that incremental supplies of logs and lumber will be required each year, and that high lumber prices will result and attract more supply; in 2020 and beyond, there is strong potential for even higher prices.

We predicted last year that the implementation of a U.S. import tax on Canadian lumber shipments to the U.S. would cause prices to rise, and this occurred earlier than we expected. However, most elements of the lumber price “super cycle” are now in place. It was always based on declining Canadian timber supplies and lumber production, as well as increasing imports into China, and this is finally playing out. Over the next five years, there will be times when timber and lumber supply in North America will not balance out, and this puts a high probability on even further record-level pricing. There are still some wild cards out there, e.g., what will happen if Canadian import duties are substantially reduced or eliminated via arbitration, and what will be the impact if a new U.S.-Canada lumber deal is struck?

Extracted from WOOD MARKETS 2018: The Solid Wood Products Outlook 2018–2022. Find the full report at

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