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Market Prices for Lumber Stumpage Products

Volume 50 No. 42 -  October 20, 2000

Prodding the Elephant

Although the B.C. coastal forest industry has been in dire straits since the bottom fell out of the Japanese hembal market a couple of years ago, you can’t say the provincial government has been busting its ass to help out. Industry has been bringing this situation to government’s attention, but up to now, Victoria’s response has been about as animated as that of a sleeping pachyderm. Coastal hembal selling prices have been below harvesting costs for about the last five years.

Apart from the economic problems in Japan, the hembal market has been changing as well, as the Japanese move from green products to kiln dried and laminated products. This trend has further depressed market prices for green hembal products. Despite this situation, stumpage rates have remained relatively unaffected. This has occurred because hembal is tied to the Stats Canada lumber index, which includes high value species such as Douglas fir and red cedar. These products keep the average price up, resulting in continued high stumpage for hembal. That situation may now be changing, however, with this month’s announcement that Victoria intends to experiment with a market based stumpage pricing system for assessing stumpage on coastal hembal.

To conduct the experiment, the B.C. Forest Service will move hembal volume held in existing cutting permits from the comparative value pricing system (CVPS), where stumpage rates are tied to a revenue target (waterbedding), to a market pricing system (MPS) where stumpage rates are tied to the selling price of hembal logs on the Vancouver log market. This means stumpage rates for hembal will be based on sales figures generated at the Vancouver Log Market instead ofthe Stats Can lumber index. This is the way stumpage charges for small business timber are determined, but as a way of providing a reprieve to major coastal licensees, government will now try applying this same concept to them as well. For the present, the change applies only to coastal hembal.

There is some risk in this change, since, tied to the log market, stumpage is likely to fluctuate more, but the majors are hoping MPS stumpage assessment will prove equitable over the long run. About 60 per cent of the B.C. coastal harvest is hembal, but since the experiment includes just existing permits, Brian Zak and Les Kiss of the Coast Forest & Lumber Association (CFLA) http://www.coastforest.org/  estimate only about eight million cubic meters are involved. Despite the switch from CVPS to MPS, the timber will still be tied to the tenure system and harvesting must meet all tenure requirements and objectives.

This hembal stumpage change is presently in its infancy, but so far it is meeting with approval. CFLA says it is a positive move on the government’s behalf and industry welcomes the reprieve. According to Brian Zak, it is also recognition that the coast is unique and different from the interior. Another positive aspect of this idea is that John Ragosta and friends at the Coalition for Fair Lumber Imports in Washington, DC have voiced no serious opposition to the experiment, so there aren’t likely to be countervailing retaliations—at least not immediately. The trial will run from October 1, 2000 to March 31, 2001, after which it will be assessed.

With hembal values so low in the market right now, moving it into an MPS evaluation system means B.C. could lose up to $15 million in stumpage. That’s just a paper loss, however, since most of the coastal companies haven’t been harvesting hembal anyway, preferring instead to harvest higher value Douglas fir and red cedar. With a lower stumpage cost for hembal, forest companies may well start harvesting it again. Other benefits such as additional employment could also accrue from the increased harvesting activity. This stumpage change doesn’t mean hembal will become immediately profitable again, but at least it will be harvested. When the hembal market improves, however, stumpage charges will rise correspondingly.

Despite the immediate impact of this change there is still a question of whether or not hembal will yield viable solid wood products in the future. The naturally occurring high defect amounts found in hembal results in serious volume losses during harvesting and manufacturing, and a further significant falldown when the lumber is kiln dried. Including all the handling and processing phases, hembal volume losses can be as high as 30 per cent to 40 per cent before any lumber gets to market.

Not only do these losses impact critically on the viability of processing hembal, but with energy costs on the rise, kiln drying is becoming even less attractive. It’s not inconceivable hembal solid wood products could disappear in favor of engineered hembal products. It may prove more practical to process hembal into chips or stranded components and re-assemble it into engineered products such as parallam or other similar componitized materials instead of producing solid wood products from it. Nobody knows what processes and products are on the horizon for hembal or what its future may ultimately be, but in the meantime, a stumpage reprieve is just the transition mechanism the coast forest industry needs to retrench.

U.S. Starts Rise

For the first time in four months, U.S. housing starts took a turn for the better in September, increasing 0.3 per cent to a seasonally adjusted annual rate of 1.530 million units. Single family starts fell 1.3 per cent to 1.233 million units, but multiple starts grew 7.6 per cent to 297,000 units. Permits followed suit with an increase of 1.3 per cent to an annualized rate of 1.506 million.

This increase in housing starts is only the second one since February, leading to speculation that U.S. housing may be perking up again. The renewed activity is being attributed to recent declines in mortgage rates. Compared to last February’s annualized starts rate of 1.822 million units, however, actual starts are 16.0 per cent lower now.

OSB Curtailed

Louisiana-Pacific (LP) has announced it will take production downtime at all its North American OSB plants for two weeks in December 2000. The company says shutdowns are being taken to adjust inventories and manage working capital levels. While the shutdowns are in progress, the company will conduct maintenance operations and make capital improvements to increase operational efficiencies.

WSPF Tuning Up

The western spruce market was mixed and variable this week. Light activity gave no support to prices, which drifted into the low

$190′s through

Wednesday. Mills put on the brakes and dug in at approximately $195 (KD R/L Std&Btr 2×4), refusing counters that dipped well below that number. Buyers resurfaced on Thursday, with just enough vigor to push the price back over $200. Traders capitalized on the renewed business and closed enough orders to record a new mark.

Mid to late week business drifted between $200 and $205. Bottom feeders were disappointed that the sub-$190 prices for which they had hoped, failed to materialize. Order files were one to two weeks on random lengths.

Commodity dimension 2×4′s recorded the only gain in random length prices.

Specifically, KD R/L Std&Btr 2×4 climbed out of the slime by a $6 zoom to $202. In KD R/L #2&Btr, 2×6 wiped out $3 to $208 in an effort to attract buyers; 2×8 rocketed downward $26 to $204; 2×10 was the only stable number, maintaining at $275; even scarce 2×12 erased $5 to $355. Straight lengths also demonstrated $5$10 downward corrections on most items.

Studs Stinking

Volumes on sales were gratifying this week, but prices stank, said traders. All the usual suspects participated in this market including distribution, wholesale, local and international trade. Order files pushed into the week of November 6. Producers reworked the quota-free discounts they had been granting Canadian customers through the summer months, in an attempt to push prices back in line with those charged to U.S. buyers. As another quota quarter ends, producers are working their calculators furiously to check on their remaining quota allotments.

MSR Holds Firm

Machine stress rated products follow their own drummer. In a week when the western dimension market was bobbing on a current of malaise, MSR held firm. Prices did not follow the trend of WSPF commodity lumber. Most products held within a few dollars of the previous week’s levels. Order files were one week or slightly more.

ESPF Steep & Deep

Customers offered deep discounts in the range of $20-$25 on KD R/L Std&Btr 2×4 ESPF. Traders found it steep trying to stick within a $10 to $15 range and still close the sale. Eastern spruce 2×4-9′ studs were the dogs of the market.

Cedar Sniffing Around

The big boys are doing a lot of tire kicking, plant touring and glad handing with sales reps. Although quantities of premium products are being lined up and  delivery schedules are being discussed,  few orders have been sealed for 2001.  Current sales continue to be highly  mixed and specified. One trader reported  an order with a dozen different products  in a single load. Configuring that shipment  would be enough to drive most  insane, but that service comes with a  smile when you are paying for the best.  Prices are flat to slightly off on decking  and other products that are passing out  of season. Makers report inventories under

control with no backlog.

Fir Triple Bounced

Three good bounces off the bottom  in the last several weeks have brought  buyers back to the table in fir. Production  outtakes announced for pulp, Southern  Yellow Pine, and OSB have perked  up interest in fir, both KD and green.

OSB & Plywood

The announcement of production

curtailments this week from two of the  largest producers of  OSB put an abrupt  end to the recent weakness in prices.  Although the two week shutdown at L-P  will not to take place until December,  and G-P did not say which plants will  close or for how long, the announcements  were enough to light a fire under  buyers and spark prices higher.  In eastern Canada, 7/16” Toronto  jumped $10 to C$230 before most producers  went off the market to re-assess  where they should next set prices. Construction  in Ontario is very active as  builders take advantage of fine fall  weather while they try to catch up with  projects delayed by the long wet summer.  Some builders say they are right  on schedule and intend to start projects  now rather than waiting for spring.  Traders report that some of the bigger  dealers are buying heavily in  expectation of an active fall building  season. Order files are nearly through  the week of November 13.  In western Canada, prices also  moved higher, but in contrast to the east,  most of the push came from U.S. buyers.  “They let inventories get too low, or had  to cover shorts, and when prices turned  higher, they all jumped in at the same  time,” said a delighted trader. In Vancouver,  7/16” is selling for C$234, and  producers say they are taking no  counters. Order files are well into the week of November 6.

Cargo & Reload

In the U.S. northeast, October lumber  business is turning out to be no better  than average, according to some traders.  Activity this week was decent enough,  with prices for green fir little changed.  Selling prices were in a wider range than  usual for 2×4 and 2×6. Buyers seem  convinced prices aren’t going much lower  and a steady stream of truckload orders  was reported.  Green hemlock selling prices softened  for all items. Hemlock specialists  report that green hemlock is becoming  more difficult to sell, with an increasing  number of buyers switching to dry. According  to one trader, the current stock  market turmoil is hurting business, with  some potential customers suffering financial  losses. Delivered prices from fir  mills in the U.S. west were lower this  week, with supplier mills trying hard to  rebuild shrunken order files.

Announcements

Dr. Jack Saddler has accepted the  position of dean of the Faculty of Forestry  at the University of British Columbia,  effective December 1, 2000. Saddler  has been at UBC for the past 10 years,  the last two of which have been spent as  head of the wood science department.

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

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