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U.S. Sawlog and Pulpwood Market Update in 3Q/08 
Jan 8, 2009

U.S. Sawlog and Pulpwood Market Update in 3Q/08  

Hurricanes in the US South create problems for the forest industry
With the hurricane season more intensive than usual, wood raw-material supply flow for both pulpmills and sawmills in the US South was interrupted in the 3Q. Heavy rainfall following the severe winds drastically reduced both logging activity and the transport of logs. Late summer and early fall is typically the season when pulpmills build their log inventory for the winter season. Unless logging can be increased when hurricane season is over, wood fiber supply may be tight next spring. There is still time to catch up in terms of inventory building, but much depends on when the weather improves.

In addition to better logging conditions, there is also the issue of finding enough loggers and truckers to move the wood. This is becoming an increasing problem in the US South, and many wood consumers are worried that this will not only be a problem this fall but also in the coming years. However, the current financial crisis and the increasing unemployment rates could potentially make it easier to recruit personnel to the forestry sector.

Wood costs increased but still log compared to world prices
Average softwood and hardwood pulpwood prices were generally up $1-3/odmt in the 3Q, according to the North American Wood Fiber Review. This occurred mostly due to the higher costs of logging and transportation. Many pulpmills in the hurricane-impacted regions have reached out further to source their logs. The costs for these longer-hauled logs have often ranged over $90/odmt delivered to plant.

Wood costs down 13% in the US Northwest as chip inventories are increasing
Softwood fiber costs fell substantially in western US in the 3Q after having reached a 13-year record-high in the previous quarter. Wood chip costs in this region, which have been some of the highest in North America, declined 13% in the 3Q, but are currently still 25% higher than a year ago.

There has been a dramatic turnaround in wood fiber inventory levels in the US Northwest the past eight months. In January, the total inventory of wood chips and pulplogs was only at 18 days. As a result of the tight wood supply early in the year, the flow of roundwood chips steadily increased, reaching a record high in May 2008. With fiber consumption fairly stable in the spring and summer, most pulpmills have been able to build very high inventories of both chips and pulplogs, and chipping facilities have started to cut back production as demand is in decline. In August, the total wood fiber inventory for the region was 37 days, which was the highest inventory for the month of August since 1996.

Lumber production surprisingly high in the 2Q in western US
The US lumber market continues to be weak and sawmills have been running at very low operating rates. Western Wood Products Association (WWPA) reported that sawmills in the West ran at 67% of their practical capacity in August. Despite the low demand for lumber in the US, production in the Northwest actually increased in the 2Q from the previous quarter. This was possible because the US lumber industry benefited from reduced imports from both Canada and overseas. During the first six months, lumber imports from Canada were down 31% from last year and overseas imports have declined by 55%.

The relative high production levels at the sawmills in western US was the major reason sawlog prices in the 3Q were unchanged for hemlock and higher for Douglas-fir compared to the beginning of the year as reported by the Wood Resource Quarterly.

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