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North Traders Lumber Prices

Volume 50 No. 10 – March 10, 2000

More Consolidation Coming

The 13th annual PricewaterhouseCoopers Pacific North west Forest Industry Conference held in Vancouver, B.C. March 7, was a venue for 380 industry executives who were told B.C. forest companies posted an estimated collective profit of $600 million. A smile went through the audience at that juncture, since the turn-around follows directly on the heels of record losses of $1 billion in 1998. The speaker reported that improved profits resulted from higher commodity prices and a better supply demand balance. As you might suspect, lumber was the commodity most responsible for the profit improvement; prices averaged almost $100 higher per thousand board feet in 1999 than in 1998. This was due mainly to strong demand from a healthy U.S. economy. It’s worth noting that so far this year, lumber prices are slightly below 1999 levels. On March 12, 1999 WSPF 2×4 was $330; this week it’s $315. Two years ago at this time in 1998, WSPF 2×4 was $277.

But while profits are up, there is a dark side to the equation. The industry’s return on capital employed remains at an unacceptably low level of around six per cent. In a capital intensive and highly competitive business such as forestry, the accepted level is 12 per cent—and that’s the break-even point. This means the industry still isn’t generating high enough returns for shareholders, who can achieve better results elsewhere.

Predictions are for continuing improvement in the forest industry in 2000, due to continuing strong lumber prices and improving returns for pulp products. Projections for newsprint, however, aren’t as optimistic. With increasing use of the Internet for distribution of information such as classified ads, demand for newsprint is expected to fall. One speaker predicted the decline at 160,000 tonnes a year over the next five years, which is equivalent to shutting down one medium sized newsprint mill each year over that period. The Internet is expected to play an increasing role in the way business is done in the future and delegates were encouraged to get onboard post haste.

There were also predictions that the consolidation presently occurring in the forest industry world-wide, will continue. Without naming names, the speaker speculated two more head offices in B.C. will likely disappear in the next while.

C-Housing Up

Canada Mortgage and Housing Corporation (CMHC) http://www.cmhc-schl.gc.ca/  reports that Canadian housing starts have risen to their highest level since June 1994. January starts were reported at 150,200 units (revised), but in February, Canadian housing starts jumped to 168,000 units. The major activity was in multiples, which climbed to 75,000 units from 45,800 units in January. February multiples are at their highest level since May, 1992. Single starts came in at 70,900 units for February, compared to the January level of 82,300 units. The higher Canadian housing activity is attributed to a strong economy and mild winter weather.

CN/BNSF Praised

Claiming the proposed railway amalgamation is responding to the rapid rise of northsouth trade, the increasing integration of Canadian, U.S. and Mexican economies, and, shippers’ demand for more efficient transportation to the three country’s markets, CN President and CEO, Paul Tellier, announced the Canadian National/Burlington Northern Santa Fe (CN/BNSF) combination will provide a new truck competitive rail link to major U.S. markets and Mexican gateways. Tellier says the combination of CN and BNSF, the two most efficient railroads in North America, will operate as an integrated rail network having a continental reach, to provide critical north-south corridors.

Tellier cited Quebec as a significant beneficiary ofthe railway amalgamation. He said 84 per cent of that province’s exports normally go into the U.S., and last year, CN moved 120,000 carloads out of Quebec to U.S. destinations. According to Tellier the railway amalgamation will allow CN to penetrate deeper into the interior of North America with single line service, which will reduce dependency on trucks for north south shipments.

Last December, CN and BNSF announced plans to combine their companies in a new organization called North American Railways, Inc., to create a rail system stretching 50,000 miles, linking eight Canadian provinces and 33 states in western and central U.S.A. Under the deal, the two railways, CN and BNSF will remain separate and intact, with North American Railways as the coordinating body. Corporate headquarters will be in Montreal, and Tellier will be the company’s CEO. No one stockholder will be able to own more than 15 per cent of its voting shares and business will be conducted in both English and French. So far, the proposed amalgamation hasn’t met with wide approval, since customers fear it will reduce competition and put them at the mercy of one giant railway, which can then set freight rates at will.

WSPF Elusive

Producers sat on their hands and buyers stayed away all week. Nobody was in much of a hurry to do anything. Futures adjusted downward and took the lackluster cash market on  a slide.

With little support from new orders, there wasn’t anything to stop the glissando into the blues. Stormy weather across the southwest, especially heavy rains in California and Arizona, dampened the enthusiasm that prevailed a week earlier. Traders, however, were efficient that week, and built strong order files. As a result, producers are now waiting for the market to sort itself out. With two weeks to three weeks of production stretching the order files into the week of March 20, traders feel no pressure to perform miracles in tracking down new orders.

Prices in western spruce were like a mirage in the desert—hard to pin down. During weeks such as this, it’s difficult to tell where prices would be if sales were happening. As it was, KD R/L Std&Btr 2×4 sank like a rock $19 to $315. In KD R/L #2&Btr, 2×6 axed $25 to $310, and 2×8 lopped off $15 to $310. Wides held at levels established the previous week, only because of a lack of adequate interest to engender counter offers. KD R/L #2&Btr 2×10 and 2×12 held at $415 and $440 respectively.

Studs Hungry

Spring sales were like spring weather—off and on. Although sales of odds ‘n ends were good, bread and butter commodity studs went stale on the shelf. Industrial items sold well, but not enough to make up for the lack of volume in the KD 2×4 92-5/8″ PET studs. Second trims were also active. In contrast to growing fuel problems in U.S. shipping, trucks into Alberta reloads demonstrated a significant improvement in size, availability, and frequency. Shipping backlogs cleaned up, delivering pressure on new orders. Order files are into the week of March 20, thanks to sales booked the previous week.

ESPF Sells in Canada

Eastern producers did well to forget the U.S. this week. Sales into Canada, especially Toronto, were brisk, but the U.S. Midwest was as still as midwinter. Traders were not worried, however, with order files out a good three weeks to four weeks on studs and two weeks to three weeks on narrow dimension. Trucking costs into the U.S. are being affected by fuel surcharges of $1 to $5 per thousand board feet (based on thumbnail calculations), which are being passed along to customers. One trader remarked the fuel situation is only likely to get worse.

MSR Drowned

Heavy rains in Phoenix killed what had been a nice spring sales spurt. Traders are hoping for drier weather to renew activity in the weeks to follow. Meanwhile, bits are selling, but big orders are farther away. Order files are approximately one week.

Shingles Farsighted

Cedar roofing makers are looking into the middle of this year with optimism. Attendees at the Atlanta construction convention last week came away with the good feeling that cedar roofing will be preferred by quality home builders in the foreseeable future. The big worry is that bloated fuel prices will result in higher inflation and interest rates, which could kill the construction business. Prices increased approximately $5 on #1 Royals and Five-X as scarcity compressed by demand pushed the numbers up.

Cedar Mediocre

Makers busied themselves filling small orders this week, while the biggies held off for later in the season. Best sellers were 4×4-8′ clears that went for deck materials. Prices held on all cedar items, following an upward adjustment by major makers about two weeks ago.

Fir Static

Amazing but true, fir held steady for an entire week. The only blip was green Douglas fir where narrows added $5 to $10.

OSB & Plywood

OSB activity this week was strong in eastern Canada, but less so in the west. Winter looks almost over in southern Ontario, where temperatures are decidedly  spring-like. Job sites are busy in Canada and the U.S., and demand for OSB is strong. Much of the push comes from the U.S. side, where buyers consider they are still under-supplied. Order files are out to April 10, and secondary supplies are scarce. It looks like the catch-up game will continue.  Adding to the supply problem is the news that one L-P mill is off the market because of a dispute with truckers over fuel surcharges.  In addition, a press problem at a  Weyerhaeuser mill, now looks like it will  cause a shutdown. Traders predict supplies  will get even tighter and prices will move  higher. This week 7/16” Toronto jumped  $35 from a week ago to C$440.  Out west, OSB demand is more restrained  because of continuing wet weather  in southern California. The perception is  that the golden state is under-bought, and  must make major OSB purchases to prepare  for a building season that will start  with a bang when the rains stop.  OSB producers in B.C. report order  files solidly out to April 3. They say 75 per  cent of their business is with rain-plagued  California. Of the remaining 25 per cent,  most is heading to the northwest states,  while little or nothing is going to Lower  Mainland B.C. In spite of this, 7/16” Vancouver  prices managed a $15 gain to C$427.  There is no downside to the OSB market,  say traders.

Cargo & Reload

Volume buying has returned in the  U.S. northeast. Customers believe there is  no downside risk. Inventories are sufficient  to allow shopping around, and buyers  remain unwilling to pay extra for prompt  wood. Although some stocking wholesalers  have sold large volumes, there is little  pressure on prices and no urgency to buy.  Traders believe there is lots of lumber in  the pipeline. Sounds like a buyers market,  doesn’t it?  Fir mills in the U.S. west are waiting  for better weather in California and have  not offered much lumber to northeastern  wholesalers. Counters are unwelcome, and  delivered prices are edging higher. A few  offerings have been made by B.C. fir mills.  Selling prices this week were softer for  green fir, but there was little change in  green hemlock. To the surprise of no one,  fuel surcharges are adding to the cost of  delivering lumber in the northeast. Everyone  we spoke with is paying extra.

Announcements

Randy Bilesky, formerly of Can Arc,  has been hired by Meeker Lumber Ltd., of  Mission B.C. Bilesky will be responsible for  panel product sales and sales of SPF dimension  products in the B.C. and Pacific Northwest  markets.

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

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