Forest products trade trends

Homebody Economics

In the US, forest product supply and demand forecasts begin at home…or more correctly with housing starts. And housing prices are a kick starter for housing starts. Coming out of COVID in 2020, “New Residential Construction” took off and remained high before moderating in 2022. In the latest data (July) building permits and starts are trending downward, as are housing completions albeit at a higher rate than either starts or permits.

Home Depot’s monthly newsletter The Forecast in their August issue put some context for the sluggish performance in the recent housing market, stating that median existing home prices had climbed to a record high, 6% more than 2023, while existing home sales had dropped for three straight months due to “elevated prices, mortgage rates and insurance rates.” The newsletter also observed high mortgage rates have caused the lock-in effect to continue for long-time homeowners. People with homes purchased under low interest rates are reluctant to move to new houses under higher rates. They stay in place, reducing the number of homes on the market. And the stay in place mentality has in turn lowered demand for new homes, and the lumber to build them.

Forest Economic Advisors (FEA) in the April “2024 Forest Products Outlook” suggested that there is an underlying demand for more housing starts but that realization was “constrained” by a combination of interest rates, rising inflation fears and the cost and availability of labor in an economy with a 4.2% unemployment rate. The FEA points out that the US housing stock has aged as “49% of the US owner-occupied homes were built before 1980; only 9.4% were built between 2010 and 2021.” The aged housing stock also supports the notion that there is an underlying demand for housing and thus lumber. For these reasons and others, the FEA was forecasting “lumber consumption will see moderate growth in 2024 and more robust growth in 2025.”

The FEA forecast is looking solid as the US economy over the last two years has outperformed the predictions of many economists largely due to consumers continuing to spend. National Retail Federation (NRF) Chief Economist Jack Kleinhenz recently said, “The U.S. economy is clearly not in a recession nor is it likely to head into a recession in the home stretch of 2024.” Adding, “Instead, it appears that the economy is on the cusp of nailing a long-awaited soft landing with a simultaneous cooling of growth and inflation.”

What does this all mean for lumber demand in the US? It is likely in 2025 the demand for forest products will again move upward, although not at the same pace as the industry experienced while emerging from the COVID induced recession. However, like a magna pool of a volcano waiting to erupt, there is an unrealized demand sitting just beneath the surface of the US economy. And if conditions are right in 2025, demand for forest products could overflow current expectations. As the United Nations Economic Commission for Europe (UNECE) succinctly expressed the lumber supply and demand situation in the US, “housing units have not kept pace with population growth.”

However, there are several other non-domestic factors that influence the supply and demand equation and could tap down this bubbling resurgence.

A Very Cross Border Affair

In most respects, the relationship between Canada and the US has been remarkably agreeable for decades, a standard to which few nations sharing such long borders can match. However, the exception to this amenable norm is softwood lumber.

In 2006 the Canada-United States Softwood Lumber Agreement (SLA) managed softwood lumber trade between the US and Canada for nine years. The SLA pact expired in October 2015. Since May 2017, Canadian softwood lumber exports to the US have been subject to countervailing and anti-dumping duties. In the past, Canada has successfully challenged these actions under the dispute resolution provisions of the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA), and succeeding the United States-Mexico Canada (USMCA) trade agreement.

The US government along with domestic wood producers — the US Lumber Coalition — have long argued that in Canada, provinces set timber fees for wood harvested from Crown land, which gives them an unfair pricing advantage over the US competitors. This in turn “distorts” the US lumber market.

On August 13th the US increased the duties on Canadian softwood lumber imports from 8.05% to 14.54%. The hike was even higher than the 13.86% hike the Department of Commerce (DOC) projected earlier in the year.

This is a big blow for Canada’s forest product exports. Forest products are a key export, and the US is the largest trade partner. According to Statistics Canada data, in the first half of 2024 Canada’s lumber exports to the US rose by 3% compared to 2023. Export volume reached 14.7 million and the value of these exports increased by 7% to $2.95 billion.

The hike in duties, coming after the most destructive forest fire year on record, is a double whammy for softwood exporters in British Columbia (BC).

According to Canadian data, BC exported 5.4 million c/m of lumber worth $1.73 billion (US$1.27 billion) to the US over the first six months of 2024, amount to 76% of all lumber exports.

In response to the Kurt Niquidet, President of the BC Lumber Trade Council (BCLTC) wrote, “These duties continue to be unjustified and unfair. Commerce [DOC] has departed from long-standing methodologies, resulting in the higher rates announced today. These rates will hurt US consumers by increasing the cost of lumber and building materials at a time when concerns about affordability continue to impact consumers on both sides of the border.”

Canada’s Minister of Export Promotion, International Trade and Economic Development echoed Niquidet’s remarks, stating, “Baseless and unfair US duties on softwood lumber unjustifiably harm consumers and producers on both sides of the border.”

While it’s doubtful that Canada’s displeasure with the duties will have any impact on Washington policymakers, who are fully engaged in the politics of an election-year. There is more than a grain of truth in the assertion that the duties will boost forest product prices in the US.

Shifting Trade

There are new patterns emerging in the post-COVID trade in forest products. The US is the largest producer and among the largest consumers of forest products. And the US as key importer and exporter of forest products is influenced by geo-political events that impact all international trade.

Looking back at pre-COVID export numbers in 2017, China was the top destination for US forest products at $3.19 billion. However, in 2023, China had fallen into the second slot $1.48 billion, while Canada had taken over the top at $2.33 billion. Largely over the last decade China and Canada flipped flopped over the position of one and two as export destinations for forest products, the difference now is that China has fallen considerably farther back as an export destination of US forest products.

Part of the reason is domestic economics: China’s property sector has been in a prolonged slump since 2021. There are doubts whether the sector has hit bottom, and investor confidence is low. A second factor is the ongoing trade war between the US and China. The de-coupling process that corporations both in China and the US have adopted to de-risk their sourcing activities has also contributed to a decline in bilateral business — although not to the extent in other sensitive sectors like tech. Added to this is China’s export surge across multiple sectors that has alarmed trading partners. Whether it is the EU, the US or Canada, China’s manufacturing surplus is a problem that impacts every sector.

However, the US is finding new trade partners to take up the slack. A recent report noted that US lumber exports to the Middle East is growing. Hardwood lumber exports to the MENA (Middle East North Africa) region grew 6% in the first half of 2024, totaling $34.93 million. Exports to the United Arab Emirates (UAE) increased by 27%, reaching 10,192 cu/m while Saudi Arabia notched an 8% rise with a total of 4,472 cubic meters shipped.

And other trade partners like Mexico, Japan the UK and EU are all buying more US forest products, which bodes well for the industry.