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Market Lumber Prices down on Pulp Mills

Volume 50 No. 35 – September 1, 2000

Questions, Questions, Questions!

There isn’t anyone in the lumber business these days who isn’t watching in abject despair as, week by week, lumber prices tumble lower and lower. WSPF 2×4, the bellwether commodity, started the year at $338 per thousand board feet (January 7) and this week our print price is $200. With a drop of $138 per thousand board feet over eight months, it’s hardly any wonder the lumber industry is gnashing its collective teeth.

Like any normal market situation, however, there are winners and losers. No doubt retailers are smiling broadly at the bargains they are cashing in on and home builders are chortling all the way to the bank with extra loot in their jeans. It’s unlikely house prices have gone down with the price of lumber so you can bet profit margins are up for these people. That’s business though, isn’t it? God bless anyone who can make an extra buck. It’s what we’re all trying to do.

It’s simple enough to identify the results of this lumber market downturn, but determining when fortunes might turn around is a more complex matter. The cause of the present lumber market turmoil is oversupply. As we all know, when supply is tight, up go prices and vice versa. Turning the lumber market around then is very simple—get rid of the oversupply. “Ah,” you say, “there’s the rub”, and indeed there it is. How do we get rid of the oversupply? “Well,” you respond, “starve the market of course”. It sounds easy, but it’s not.

So who is the culprit that overproduced and sent the market into the current tailspin? The answer lies to the south of us. Earlier this year, U.S. lumber producers began cranking out more lumber than they could sell and when the market was saturated, they began stockpiling. We Canadians can happily point to the Americans this time because we are held in check by the wonderful Canada U.S. Softwood Lumber Agreement. Under this restriction, it’s next to impossible for Canadian producers to over supply the U.S. market—especially when lumber prices are down.

Canadians can exceed their individual export quota restrictions, but in so doing, they incur such hefty penalties that lumber prices have to be really high before even the most efficient Canadian mill would even consider this strategy. In this year’s market, the likelihood of an operation being able to absorb these super tariffs and still make money, is slim to nothing.

Despite the current inventory buildup in the U.S., supply will eventually dwindle. Canadian mills are curtailing production as are many U.S. producers.

Most operators have taken and are taking sawmill shutdowns to remove product from the market. Fact is, I’m surprised there haven’t been more curtailments in light of present lumber prices.

A factor constantly hovering in the back of people’s minds during low market conditions, is how long mills will continue to operate. That is dependent on the individual mill’s break-even point. Break-even is the point where lumber prices are so low it is no longer economical or practical to continue producing. Truth is, only the individual mill knows where that point is. I consider the break-even point for B.C. coastal mills is around $300 per thousand, while for interior B.C. mills, it’s about $260. These figures may or may not be correct, but nobody is about to confirm or deny.

The reason the break-even figure is so nebulous is because there are extenuating circumstances. For instance, any manager will tell you shutting completely down costs money. You simply can’t turn off the key and walk away from a modern conversion facility. Fixed costs go on of course, and equipment must be maintained in preparation for the eventual startup. Shutdowns also put markets in jeopardy and unfilled export quotas are transferable. Finally, there’s the impact on employees. It takes a long time to develop good people, and left unemployed, these people are quickly seconded by other operations.

Another consideration in the breakeven argument is the actual cost of producing a thousand board feet of lumber. That figure varies with each individual mill, and since there are as many ways of assessing costs as there are operations, there is no common basis for comparison.

At least one more factor figures into the shutdown decision and that’s the pulp market. In B.C., most pulp chip volume is generated by the sawmills and this fact figures prominently in any decision to operate or shut down. If the pulp market is doing well, which it is at present, many operations will continue producing lumber to generate chips, since chips can be a rewarding profit center. I suspect many B.C. sawmills are operating today despite the current poor lumber market, because the pulp market is hot.

So let’s put it all together and see what conclusion we can arrive at: The present lumber oversupply situation is both simple and complex. Simple because you need only starve the market to drive lumber prices up again; complex because with the inventory that’s out there, starving the market is difficult. I don’t see the lumber market changing until the pulp market changes, which means we could see lumber prices in the tank for some time—and don’t forget pulp market cycles are generally slower than those of the lumber market. That puts us right back to where we started—when will the lumber market improve? That question can only be answered by another question—when will the pulp market head down? If you’ve got the answer to that question, there’s a lot of people who want to talk to you.

WF Gets Power

West Fraser Timber Co. Ltd., http://www.westfraser.com/index.asp  has made an agreement with EPCOR Utilities Inc., of Alberta, to provide competitively priced power for its Slave Lake Pulp and Ranger Board MDF operations, as well as the company’s joint venture in Alberta Newsprint. The deal, which became possible when the Alberta government decided to deregulate its electricity industry this year, reduces the risk of power costs rising in the future. EPCOR, became a power distributor when it successfully bid for two power sources, providing the company with 1373 megawatts for distribution. The EPCOR deal gives West Fraser access to 215 megawatts of electricity for up to 20 years.

New Quebec Mill

Louisiana-Pacific Corp., Canada’s largest OSB producer since its takeover of Groupe Forex last year, has announced it will build a new $177 million OSB mill on the St. Lawrence River near Les Bergeronnes, Quebec, northeast of Quebec City. Construction is scheduled to start next spring, with completion planned for the later half of 2002. The new plant will produce 550,000 square meters of OSB per year initially, but expansion plans already in the works for 2005 and 2006, will add another 150,000 square meters a year. The project is expected to create 150 direct jobs and another 250 jobs in forestry and transportation operations.

Finns Buy Repap

Finnish forestry giant, UPM-Kymmene Corp. announces it has purchased the last remaining operation of Repap Enterprises Inc., the Miramichi mill, for $160 million. The mill, a fine paper facility, is located on the Miramichi River in New Brunswick.

This purchase brings to an end the Repap empire, which was started by George Petty, a Montreal pulp salesman. Petty, who became a high flying executive, built the company completely on borrowed money, but in 1997, his empire began coming unglued. At his height, Petty had operations in New Brunswick, Manitoba, British Columbia, and Wisconsin. The Miramichi plant produces coated groundwood paper and has a capacity of 452,000 tonnes a year. Most of the paper from this plant is shipped to the U.S., where it is used for high quality publications such as Time magazine. Repap spelled backwards is paper.

WSPF Powers Down

While not enough to warrant the word ‘flurry’, sales activity improved measurably throughout this week. Customers made a quick dip into the vast pool of available wood to replenish their field stocks before the Labor Day long weekend. This was seen by traders as the usual pre-holiday ‘power down’ activity. Mills and wholesalers who were getting orders from customers they hadn’t heard from in months, were still justifiably reluctant to take advantage of the momentary strength to push prices up. All expected customers’ ‘so what’ attitude would return in the short week following the holiday. After living through the blahs of August, traders have little hope September will demonstrate much change. Economic conditions surrounding this market do nothing to inspire confidence that there is strength to be found in the final weeks of summer.

Although this week may not have been the pivot point where this market turns, traders wondered how low the market will finally go before it begins to recover. Although customers are uncaring, knee jerk analysis says it just can’t keep going down forever. There is a downward limit where woods operations will be suspended and mills will close.

Production cutbacks are finally beginning in the U.S. and Canada. When supply becomes restricted, remaining output gains value. At this point, downside appears  to be minimal—less than $20 before  closure price is hit. Customers who do  not buy soon may lose the advantage of  substantial upside volatility. While no  one wants to build significant positions,  going too short on field inventory could  be dangerous and unprofitable.  Prices were not affected by the sales  blip. The tide was still going out in KD  R/L Std&Btr 2×4 where the undertow  ate another $5 to $200. In KD R/L  #2&Btr 2×6 eroded $5 to $200; 2×8  wiped out $5 to $235; 2×10 pegged at  $240 even with the previous week; 2×12  cleaned off another $5 to $270.  Studs Wide Ranging  Prices in western spruce studs are  spread widely between top quality premium  studs and bargain batches. Players  stumbled through this week, picking  off a few orders each day. The swell  that was seen in dimension did not  extend into studs. Counter offers were  considered in the $10-$15 range. Traders  chased business down by phone and  fax with little result. The Fort St. James  scene was electrified by a road blockade  thrown up by aboriginal tribes protesting government forest practices.

ESPF Covered

Short covering affected eastern producers  positively. Traders reported that  they were extremely busy and glad of it.  Although the pre-holiday surge was no  greater than the same period last year,  it seemed like a major flurry by contrast  with the lack of activity in recent weeks.  Order files grew from nothing to what is  now measured at several days to one  week. Worst of a good lot this week were  2×4-9’ studs which were described as  dogs and a tough sell.

Cedar Blipped Up

A good time was had by all in the  cedar business this week. Sales were  brisk. The broad spectrum of products  were rocking and rolling. Prices held  firm; customers were more concerned  with negotiating tallies than prices.  Buyers were unwilling to sign up for  long order files but committed easily to  prompt wood. Buyers were eager to buy  1/2×6 VG Clears, which are scarce in  New England. All loadings are mixed  whether they are shipped by car or  truck. This may be the beginning of the  September surge that generally precedes  the fourth quarter doldrums.

Fir Rumbling

The soft underbelly of the fir market  was exposed this week. Activity began  bubbling about mid week. The crummy  stocks were gobbled up and digested.  Now it’s only serious customers competing  for decent stocks. Prices were little  changed as all players waited to feel the  full effects of the shift in emphasis from  uncertain to positive.  OSB & Plywood  Prices are flat and activity remains  decent in the Ontario OSB market. Good  weather and construction catch-up, along  with U.S. buying, has  kept prices in the same  range for the past three weeks. Order  files are now into the week of September  5. This week 7/16″ Toronto still sells for  C$245. In western Canada, the OSB  market was described as subdued, with  few inquiries. California buyers were  active enough to keep prices in the same  range as they were last week. Order files  are out to the week of September 5. 7/16″  Vancouver is selling for C$255, although  volume buys can be obtained for less.

Cargo & Reload

Activity was good and business was steady all week, reported stocking wholesalers in the U.S. northeast. Buyers are concentrating on what they will need for the holiday weekend, with few choosing to think any farther ahead. After raining through most of August, warm weather has arrived and has allowed construction to regain normal summer levels. On ground inventories are reported adequate to meet current customer demand, although replenishment will probably be required next week, according to wholesalers. Mills in the U.S. west are said to be carrying large inventories and will welcome the chance to sell lumber. Most production curtailments are now over, so lumber supply can be expected to increase, say traders. Selling prices for green fir and hemlock were little changed this week, with all items trading in a narrow range.

Announcements

APA—The Engineered Wood Association  announces that Warren Easley,  vice president of technology and quality  at Louisiana-Pacific Corporation, Portland,  Oregon, and John LeFors, vice  president of building materials sales and  marketing at Willamette Industries, Inc.,  Portland, Oregon, have been elected  chairman and vice chairman, respectively.  Both have been APA trustees since  1996. Easley succeeds Alex Aitken, who  retired earlier this year, while LeFors  succeeds Duane Peterson, who was  with Champion International prior to its  purchase this year by International Paper.  Also appointed to the Board of Trustees  is: Robert Bagwell, International  Paper; William Corbin, Weyerhaeuser;  and Dennis Robinson, Plum Creek.  Michael Ainsworth of Ainsworth Lumber,  Vancouver, B.C. an APA trustee  since 1997, succeeds LeFors as chairman  of the APA marketing advisory committee.

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

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