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2020 Northwest Log Market: What’s Next?

2020 Northwest Log Market: What’s Next?

By Eric Clippinger, Forester, Northwest Management, Inc

2019 Review and 2020 Expectations

Softwood log markets in 2019 did not meet expectations from many industry analysts. Overall, however, the U.S. northwest market maintained prices similar to 20-year averages for most species. Not surprisingly, the 2019 log markets were well off the mark from 2018, which saw very strong prices throughout the year. When breaking the 2019 log market down by quarter, very little seasonal movement was evident and stagnate would be a good one word synopsis of the overall market. This is likely explainable by the abundance of log inventories most mills carried into the first half of 2019, the generally lessened impact from weather, wildfire and trucking issues, along with the relatively middling demand for U.S produced lumber throughout the nation and globe.

Many industry forecasters are expecting the 2020 log market to have some opportunities for slight increases but it may also follow a narrow band of variability reminiscent of 2019. Similar to last year, although this time mostly due to a dry fall in 2019, many mills will be entering 2nd quarter with decent log inventories. If lumber prices continue to increase, many mills may be well-positioned to increase their margins but this may not translate to an immediate, equivalent rise in delivered log prices. Mixed signals continue to dominate the U.S. economy with some strong figures such as unemployment rates and recent housing starts while lower than expected GDP growth and a volatile stock market are concerning to some analysts. Add on that it is a presidential election year, and many signs point towards a run-of-the-mill kind of year for the overall economy. Moreover, it’s possible that a saturated supply chain may be problematic in certain species and sorts in 2020 – but maybe not.

Housing Starts

The U.S. Census Bureau reported January 2020 seasonally adjusted housing starts at 1.567 million units – a 3.6% reduction from December.  In January reporting, single-family starts were down while multi-family starts rose slightly.  December 2019, at 1.626 million units, was the highest level of housing starts recorded since December 2006, however, most of 2019 saw moderate housing starts at around 1.2 to 1.3 million units.  Another metric, building permits, jumped 9.2% from December to 1.55 million units in January.  This is the highest level seen since 2007.  If housing permits and starts stay near these levels through the year, this will greatly help the demand side of the equation.  Unfortunately, some housing forecasters are tempering optimism from the strong levels currently seen, attributing the brunt of the uptick to mild weather and hedging against potential adverse weather and a restrained economy in 2020, predicting seasonally adjusted figures around 1.1 to 1.3 million units throughout 2020.  However, builder’s confidence is high, demographics are favorable for first-time home buyers and supplies of available single-family and multi-family dwellings remain tight.  Mass timbers, such as cross-laminated timber, use in multi-story and commercial buildings continues to gain momentum across the country and consists of an emerging market for increased lumber consumption.  Conversely, housing affordability, a lack of skilled workers and extensive regulations (in some areas) continue to be critical issues for confidence in the housing/building market.  Additionally, low mortgage rates, currently around 3.5%, and continued demand for wood-framed buildings are expected to help buoy an overall U.S. economic market that may be soft in 2020.

Random Lengths Lumber Composite Price

The Random Lengths Framing Lumber Composite Price (FLCP) is currently at $428 as of the March 6, 2020 report.  The composite price has been bolstered by stud prices as well as promising lumber futures the last few weeks.  The FLCP was at $364 one year ago.  Log markets generally follow but lag lumber markets as finished lumber accounts for the most valuable and likely end use of softwood logs.   The FLCP serves as a strong indicator for price behavior in the U.S. framing lumber market.  The graph below displays recent activity in the FLCP since the end of 2018.  As you can see, the composite price is on the increase since the start of 2020 rising $53 to date.  Another important trend is the mostly muted tone in 2019.  A small spike in February/March was followed by a sliding drop into June and then the rest of the year was relatively unchanged.  Overall, the composite price stayed on a narrow width of variability, around $50-$55 in 2019.  For context, the FLCP hit an all-time high in June 2018 at $582 and dropped precipitously to a 2018 low of $332 at the end of December.

Recent events affecting the domestic log/lumber market

An increase in domestic log availability in the U.S. northwest may be hitting the market in the next couple years.  This is attributable to an increase in forest management projects and ultimately timber harvesting on federal lands.  The U.S. Forest Service is streamlining some aspects of the internal environmental review process (NEPA) of federal timber sales and is also working with state agencies through the Good Neighbor Authority and Shared Stewardship to increase the pace and scale of management within certain identified areas in the western U.S.  Typically, specific National Forests and project areas that have been selected to concentrate restoration on are at very high wildfire risk due to vertical and horizontal fuel concentrations, are suffering from high levels of damage and mortality from insects and disease or are directly adjacent to state or private lands that could be impacted from adverse effects of lack of management. Another supply side quandary is the U.S. southeast region, which continues to crank out cheap logs and lumber with southern yellow pine lumber now reaching nearly every corner of the U.S. and global market.

In September 2019, a joint U.S.-Canada trade panel gave the U.S. 90 days to rethink its softwood lumber tariffs, finding there was no evidence Canadian imports were causing injury to the U.S. industry.  Currently, U.S. duties on Canadian lumber are in the preliminary stages of being significantly reduced according to trade contacts within both countries.  The changes would likely take effect in August 2020 and would help relieve some of the log and lumber market free fall that has plagued Canada producers, most notably in British Columbia.  On the other hand, this development could create more competition for domestic mills and ultimately allow an increased flow of Canadian finished product into the U.S. marketplace.  The U.S. imposed duties on most Canadian softwood exports in April 2017, alleging that Canada was unfairly subsidizing its industry and dumping wood into the U.S. at unfair prices.

Another recent announcement was the signing of a Phase 1 trade deal between the U.S. and China which should provide some much needed relief for the beleaguered domestic hardwood industry.  China had greatly reduced imports of U.S. hardwood lumber at the beginning of the U.S.-China trade war turning to other global sources but the new Phase 1 requires China to source more hardwood lumber from the U.S.  However, Phase 1 did not address softwood logs and lumber which still face variable amounts of tariffs from China.  Softwood log export volumes and prices have been soft the last couple of years and are predicted to stay that way due to short-term impacts including the slowing Asian economies, the recent flood of European and Russian logs into SE Asian markets and the coronavirus situation….

Very recently, caution and restraint have overtaken global stock markets as well as the log and lumber futures market as the novel coronavirus spreads throughout the globe causing financial markets to respond negatively.  China’s lumber market has been particularly hard-hit, and all eyes are on the daily updates of the numbers of confirmed cases related to the virus to gauge the potential temporal and spatial effects on global markets.

2020 U.S. macro-economy indicators

The 2020 U.S. economy will be driven by certain fundamentals which include a very low unemployment rate at 3.5% as of February 2020.  Unemployment is forecast to hover around 3.5%-4% this year.  Inflation rose to 2.5% in January and is estimated to be 1.5%-2.5% throughout 2020.  Interest rates are currently at 1%-1.25% following the emergency rate cut by the Federal Reserve on March 3rd.   Analysts predict that the Reserve will be forced to make several more cuts this year lowering the rate to 0%-0.5% to keep the economy invigorated and healthy.  Last, 2019 4th quarter GDP growth (quarter over quarter) was 2.1%, while overall annual GDP growth in 2019 was 2.3%, the lowest figure since 2016.  Forecasters are estimating GDP growth to hover around 2% throughout 2020.

Sources:
Trading Economics; https://tradingeconomics.com/
Forest Economics Advisors, Wood Markets Monthly; 2020 Global Lumber Markets Outlook https://www.woodbusiness.ca/2020-global-lumber-markets-outlook/
Random Lengths, 02/28/2020
Random Lengths, 03/06/2020
Forest 2 Market, PNW Log & Lumber Prices: 1Q2020 Update https://www.forest2market.com/blog/pnw-log-lumber-prices-1q2020-update

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