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Japanese Lumber Market Prices

Volume 50 No. 11 – March 17, 2000

Keeping an Eye on Japan

After three consecutive years in decline, housing starts in Japan increased 1.4 per cent in 1999 to 1,214,601 units. These statistics, released in Japan Lumber Reports (JLR), No 317 were met with enthusiasm in B.C., even though they fell below previous predictions of1.3 million. Japan normally builds between 1.2 million and 1.3 million housing units every year. The enthusiasm is probably short lived, however, for Japan is now officially in recession, having reported two successive quarters of reduced economic activity.

It is interesting to note that Japan, with an area barely 1/26th the size, and a population of 126 million (in 1998), builds nearly as many houses each year as the U.S., making it the second largest market for sawn lumber. Figures indicate there are 50.2 million housing units nationwide, with a 10 per cent vacancy rate. Because the country is small and land is at a premium, houses are usually rebuilt every 20 years to 30 years.

About half of all houses constructed in Japan are currently built of wood, including traditional Japanese houses, which utilize a post and beam system. Average floor area for a Japanese house varies between 92 square meters and 122 square meters, which equates to about 1,000 square feet to 1,300 square feet. For some time now, North American lumber producers have been promoting 2×4 frame construction in the Japanese housing industry, but according to Japan Lumber Journal, the number of wood-built houses has been decreasing over the years.

Part of the reason could be attributed to cost. As of April, 1999,

average price of a newly built detached house is US$317,500. This, says JLR, is the highest average cost in the world. A significant contributor to this high cost is land, which is sold on a square meter basis. In central Tokyo, for instance, land costs US$3,800 per square meter on average—even with the current sad state of the Japanese economy. If you decide to have a house built there, expect to pay around US$1,300 per square meter of flooring area.

Although it is a small country, Japan boasts some forest resources, including Japanese cedar and Japanese cypress. In fact, the Japanese supply about 25 per cent of their own needs—approximately 30 million cubic meters a year. Imported logs and lumber from North America, Scandinavia (and other European countries), Southsea Islands, Russia, and New Zealand, make up the remaining 75 per cent.

Last year, (June, 1999) Japan moved to improve house construction quality and increase consumer protection by revising its Building Standards Law. This law, which controls all construction from large buildings to detached houses, was last revised 48 years ago. The result is the Housing Quality Assurance Law (HQAL), which comes into effect April first of this year. This law shifts the emphasis from specification oriented to performance oriented construction requirements.

A significant requirement is a 10 year warranty against defects, even to the point

of a slightly sloping floor. Previously, builder warranties applied for one year on wooden buildings and two years on other structures. These short warranty periods tempted some builders into skimping on construction methods and building materials, leaving the home owner with many problems that arose after warranties expired. Sounds a bit like the leaky condo situation in Vancouver, doesn’t it?

Under the HQAL, builders are responsible for eight requirements which include: stability of the structure, fire safety, main structural components, maintenance considerations, heat conservation, air circulation, natural light environment, consideration of the elderly, and sound proofing. Sound proofing is the only optional requirement. The Japanese government is currently developing criteria called Judgment Standards for Defects, to jive with HQAL requirements. Not only must the builder meet physical construction requirements, but his economic position also comes under scrutiny to ascertain if he will still be in

business in 10 years. Builders failing to meet all requirements could be expelled from the business.

In cases where disputes arise, the Japanese are establishing an Alternative Dispute Resolution (ADR) body. Previously, owners having trouble with their building negotiated directly with the builder, but such negotiations will now be handled by the ADR. To help keep all builders honest, Japan is putting 1,800 construction supervisors in place. If legitimate defects are attributed to the builder, he must make reparations—up to 10 years after construction. The Japanese are serious about their intention.

A significant result of the HQAL that impacts directly on B.C. coastal lumber producers, is a strong shift to kiln dried and laminated lumber products that help meet HQAL requirements. Traditionally, Japan has been a green hemlock market, but with the new HQAL in place, coastal mills are scrambling to install dry kilns and produce dry hemlock. Drying hemlock is not a simple operation, since falldown can exceed 40 per cent. To get satisfactory drying results, mills must improve moisture sensing in the breakdown process and narrow moisture content ranges in the drying process.

There is little doubt the Japanese are serious about improving quality in their house building industry. A house is normally the biggest investment people make in their lifetime and buyers want a sound structure that provides warm, dry habitation. There is always the possibility an overzealous attempt to thwart the house construction problem will send the pendulum too far in the opposite direction, but then try telling that to someone with a leaking roof and a ruined home.

U.S. Housing Up

Bolstered by multi family starts that rose 19.2 per cent to 471,000 units, February U.S. housing starts rose 1.3 per cent to a seasonally adjusted annual rate of 1.781 million units. This level was above the consensus estimate which estimated 1.7 million units total for February. But while multi family starts held the spotlight, February single family starts fell 3.9 per cent to a rate of 1.310 million units. In addition, building permits, the indicator of future activity, dropped 8.0 per cent to a rate of 1.631 million, the biggest drop since 1995. Analysts perceive the drop in single family units and permits as indication the market is slowing.

Region by region, February starts rose in all areas but the South. The Northeast rose 21.3 per cent; the Midwest rose 21.1 per cent; while the West climbed 1.3 per cent. The South dropped 11.3 per cent.

Softwood Quota Shipments to US as of March 17, 2000

(1000 fbm)

No Fee Base Lower Fee Base* Upper Fee Base** Bonus Total
4th Qtr YTD 4th Qtr YTD 4th Qtr YTD 4th Qtr YTD Shipped
BC 1416037 7974480 74571 239319 21890 74926 26538 75030 8363757
Alberta 200461 1083584 4748 43767 40962 136187 5332 12210 1275749
Ontario 367115 1579601 11210 17188 6594 17835 1548 5189 1619814
Quebec 678231 3617469 38852 84182 5377 16901 14189 27951 3746504
TOTAL 2661845 14255136 129381 384456 74825 245851 47607 120380 15005826
% Used 18.10% 96.97% 19.90% 59.15% n/a n/a n/a n/a n/a
Year Ago – March 17, 1999
TOTAL 2571458 14288564 188799 456510 57859 109753 0 38152 14892981
% Used 17.49% 97.20% 29.05% 70.23% n/a n/a n/a n/a n/a
*LFB based on total allotment of 560,000,000 fbm NFB based on total allotment of 14.7 billion fbm
**UFB Based on total allotment of 110,000,000 fbm for BC Year end is March 31, 2000
**No limit on shipments from provinces excluding BC Source: Export Import Controls Bureau

It’s worth noting, that while the February annualized starts rate rose 1.3 per cent, the actual starts rate rose 14.3 per cent. The same applies to permits: annualized permits fell 8.0 per cent, but actual permits rose 8.2 per cent above the January level.

Beetles Hungry

With the last three winters the mildest on record, mountain pine beetle attacks are out of control in the B.C. interior. Entomologists estimate beetle survival rate has increased from 15 per cent to 65 per cent during this period and the area of infestation now covers approximately 350,000 hectares. There is growing fear that if this summer is hot and dry, the size of the infestation could double.

Government and industry have responded to beetle attacks by increasing the harvest in beetle infested areas. In some cases, up to 75 per cent of forest companies’ allowable annual cuts have been allocated to infected timber. Government says it has spent $18 million providing access roads into beetle infested areas. Estimates indicate, however, approximately six million cubic meters of diseased timber are still standing, providing a convenient nursery for further attacks. Attempts at controlling the spread of the mountain pine beetle could all be in vain, however, since during a hot dry summer, beetle killed trees act like a kerosene wick to every lightning storm passing by, and fire is one control mechanism the mountain pine beetle can’t thwart.

MarketWrap-up

WSPF Responsive

After trudging through the first few days of this week, which lacked the verve of last week, there wasn’t much to recommend in this market. Customers claimed demand was down, while mills insisted business was ■■PJIBinjlBtipBBM good. The

measure of success—order files—lingered at levels attained two weeks ago. Oddball orders formed most of the action. Wholesalers were unwilling to take positions because there was no profit in turning the wood around. Commodity dimension items were the softest of a spongy bunch, while long straight lengths were a bright spot. Specified items performed better than random dimension.

A Thursday stock market rally plus close of the futures contract, gave cash lumber a tremendous boost. Improved housing starts supported the rally while declining permits detracted from it, but at the end of the week, volumes benefited. Order files expanded to the week of March 27 or April 3. Quota problems seemed minor compared to the debate over fuel prices. Fuel surcharges by truckers are giving shippers hiccups.

In KD RL Std&Btr, 2×4 settled on a $9 increase to $324 with some mills getting as much as $328 by the end of the week. 2×6 plumped up $13 to $323; 2×8 followed suit with a $15 increase to $325. Wide dimension, stepping to its own drum, continued to slide off. KD R/L #2&Btr 2×10 zipped down $10 to $415, and 2×12 snipped off $5 to $435.

Studs Demystified

The fabled ‘wall of wood’ that has preoccupied buyers at the end of each quota period, has been forgotten this quarter. Customers have concluded that after four years with no backlog flooding over the border on Day Q+1, perhaps the wall never existed. It’s never too late to get smart. Stud producers calculated they would be within a few sticks of hitting their quota right on the mark. The stock market rally on the Dow Jones had traders anticipating a good spring. Economic confidence bodes well for the lumber business. Order files are out through the end of March. Given these positive conditions, producers are reluctant to give an inch on prices.

ESPF Dips At End

While totals for the week were very satisfactory, a dip on Thursday had traders scratching their heads. Although the eastern market generally lags a few days behind the west, a hot stock market should have produced immediate sales. Producers, however, were happy with the week taken as a whole. Order files are approximately three weeks.

MSR Flabby

Schizophrenic customers had traders running for cover. Mills were pumping out wood, which meant lots on the books to sell. Last week, hard work by traders produced gratifying weekend totals, but this week it was tougher going. One trader said it was “like wading through mush”. A little sharp-pencil dealing did result in orders. Midwestern customers were most active. Order files were on the calendar into the week of April 3.

Cedar Appearance Sizzles

Appearance grade products are the darlings of the cedar business this year. High end grades positively sizzle. Holding the line on prices should keep cedar in the running for this year’s premium building products market. Manufacturers anticipate keeping price increases to a minimum will encourage customer confidence and promote a relationship with quality wood products. Commons, in contrast, are giving makers a headache; sales are dogged and diminutive.

OSB & Plywood

This week it was catch up time for western OSB producers. Although the B.C. market is not yet under way, demand from California and Nevada has pushed B.C. asking prices sharply higher. California is only beginning to dry out, but buyers are using long OSB order files to even out delivery times. Mill order files are out to the weeks of April 10 and April 17. California buyers decided that even at today’s prices, taking delivery in late April or early May will maintain their inventory until the weather improves and construction is under way. This week, demand from the U.S. pushed 7/16” Vancouver up to C$450, a gain of $23 from a week ago. In eastern Canada, the OSB market is active on both sides of the border. Eastern Canadian OSB producers report order files from March 27 out to April 10. Production problems at a Weyerhaeuser mill and a dispute with truckers about fuel surcharges at an L-P mill in Quebec, continue adding supply uncertainty to the market. OSB prices this week are firm to higher for all items, with 7/16” Toronto up $5 to C$455. Supply is reported tight, and counters are being ignored.

Cargo & Reload

Lumber market activity in the U.S. northeast ranged from decent to strong. Buying is spotty, with some customers ordering heavily, while others order cautiously. “Some yards may have held off too long,” said one trader. Selling prices for green fir inched higher for most items, but traders say it’s a difficult job to get selling prices to reflect current replacement prices. To keep their customers interested, fir mills in the U.S. west adjusted delivered prices for all items, with only 2×10 moving higher. California buying is slow, which could explain the cautious pricing policy. Green hemlock selling prices continue trading in a very narrow range. Supply is tight.

Refer to Madison’s Lumber Reporter for the latest news in the lumber industry.

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