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Business Conditions in the US Hardwood Sector
¡¾March.02, 2002¡¿

Kiln-dried lumber inventories are still relatively high and kiln-dried wood is inexpensive relative to green lumber. As a result, KD demand is likely to increase and supplies may become somewhat tighter this spring. Furthermore, the supply of KD lumber may decrease in the near future. Due to low prices, many drying operations have shut down part or all of their kiln capacity, a trend which is still ongoing. Also, in view of low supplies of green lumber last fall, there is hardly any supply of air-died lumber available. Kilns will have to be fed with very moist lumber, thereby extending drying times.

The American economy - and by implication conditions in the hardwood business - may recover in the second or third quarter of 2002. Several of the key economic indicators affecting the hardwood industry have been improving a bit over the last two months. The leading business indicators point to better prospects, and consumer spending is forecast to increase in the second quarter of this year. Mortgage rates are very low and conditions to purchase a home are favourable. Housing starts and new homes sales are running above 2001 levels.

Price Indices for Selected US Wood Products 2001



In spite of improving economic conditions, sales in the sawmill industry are still negatively impacted by risks of customer default. Suppliers must keep a sharp eye on clients' credit worthiness and accounts receivable. Many buyers are in a vulnerable financial position. The profitability of sawmills is further impaired by rising personnel insurance costs, even companies with good safety records are facing higher workman's compensation and medical insurance premiums.

The fairly good new home market as well as a resurgence in remodelling, provides positive impetus for the lumber industry.

However, kitchen cabinet sales are still sluggish, but better business conditions are expected in the in the future. When the economy improves and housing starts accelerate further the demand for kitchen cabinets will follow suit. Manufacturers are already buying more lumber and some of them are starting to hire again more workers. Generally, the demand emanating from small secondary wood-products manufacturers has been stronger than from their larger cousins. Hard Maple, Red Oak and Cherry continue to dominate sales to the cabinet industry while sales of Soft Maple and White Oak are less vibrant.

The furniture industry is witnessing only a modest improvement in their business conditions. Presently, manufacturers' orders for lumber stem mostly from the need to replenish inventories and less from an improvement in the demand. In the short term we may see more lumber purchases, above all for kiln-dried items, specialised products and customised sizes. In the
longer-term, the outlook for domestic furniture production and lumber usage is less rosy. While retail sales may rebound later in 2002 - except for high-end items - production will continue to shift to the Far East.

Furniture and other secondary wood-product manufacturers are no longer buying full trailer loads of lumber. As furniture and cabinet manufacturers are constantly searching new ways to reduce expenses, they are shifting the inventory burden more and more to the lumber suppliers. This, however, will work out to the disadvantage of buyers if demand should pick up and supplies become tighter.

The demand for wood components is closely linked to the fate of the furniture industry. As the situation in this industry is still weak, the component demand may contract a bit during the next few months. Some recovery may be expected later this year.

Several new Strip Flooring plants have opened in the U.S. and Canada. Even though the strong housing market will generate a healthy demand for flooring products, the relatively large number of suppliers renders the market very competitive and prices may stay level. Oak floors remain popular but Hard Maple products seem to be waning a bit.

Conditions in the low-grade lumber segment are similar to the overall lumber situation. Demand is not strong but in balance with the supply. Only the Northern region suffers under some excessive supplies, mainly common Aspen and Spruce-Pine-Fir (SPF). The demand for railroad ties is good, outperforming all other low-grade markets.

There are no grounds to expect significant changes in export sales in the near term unless the American dollar softens and/or the euro strengthens, neither event is anticipated before the middle of this year. As more and more of the American furniture production is relocated to China and South East Asia, we will see increased wood exports to these regions. This, however, will not offset the loss of lumber sales to domestic American furniture manufacturers.

The table below summarized the price movements of selected wooden raw materials, finished and semi-finished products during the past twelve months.

Demand, supply and price movements vary significantly between different species, quality grades, drying levels, and growing regions. Below, we are listing the price changes of several widely used species during the past month. (Note that the following comments and data refer to 1000 Board Feet (MBF) of top-quality lumber, 1" thick. Imported lumber is quoted at dockside West Coast port of entry. Approximately $ 50.00 to $ 55.00 will have to be added for East Coast ports.)

Imported Species

The Brazilian government's ban on Genuine Mahogany production and exportation has created much uncertainty in the market. Genuine Mahogany supplies are already tight and end-users will increasingly switching to other species such as African Mahogany. The long-term viability of Genuine Mahogany trade is not assured.

Tropical Species

S.American Mahogany
	KD	US$3515	US$20
	AD	US$3075	US$20
African Mahogany
	KD	US$2030	No Change

Supplies of Red Oak logs and green lumber are relatively low and kilns are operating below capacity. Some end-users are already feeling a shortage of KD Red Oak. Thick stocks of Red Oak are not selling well at the moment. The share of Red Oak in the wood component market seems to decline in favor of a higher usage of Hard Maple and Cherry.

Red Oak
Northern Region	KD	US$1620	US$15
	AD	US$1290	US$10
Southern Region	KD	US$1285	US$5
	AD	US$1000	No Change
Appalachians	KD	US$1490	No Change
	AD	US$1138	No Change

White Oak is a popular export species, but overseas markets are very competitive. Domestic White Oak usage in the furniture, cabinet and dimension sectors is sluggish. Widely used substitute species such as Ash and Red Oak remain relatively inexpensive. Demand for flooring purposes is also slow. Both, strip and truck flooring manufacturers are limiting purchases.

White Oak
Northern Region	KD	US$1215	US$5
	AD	US$805	No Change
Southern Region	KD	US$1135	US$5
	AD	US$795	No Change
Appalachians	KD	US$1250	No Change
	AD	US$900	US$10

Cherry lumber markets are still weak. Buyers continue to ask for a wide variety of different length specifications causing considerable anxiety for many suppliers. Lumber inventories at furniture plants are low which may foreshadow a higher demand in the near future, above all for the upper grades.

Cherry
Appalachians	KD	US$3090	US$10
	AD	US$2420	No Change

Hard Maple production has been lower than normal so far this winter, but a higher Canadian output compensated for the shortage. The supply may improve in the next two months when the preferred winter cut stock becomes available.

Hard Maple
Northern Region	KD	US$2190	US$10
	AD	US$1785	US$10
Appalachians	KD	US$2000	No Change
	AD	US$1670	US$20

Except for high quality, white stock, the demand for Soft Maple is poor. Common Soft Maple shipments may increase slightly in the near future because inventories at furniture plants are running low.

Soft Maple
Northern Region	KD	US$1380	No Change
	AD	US$980	US$10
Appalachians	KD	US$1365	No Change
	AD	US$1000	S$10

Walnut producers experienced good markets recently, a situation which is likely to prevail for some time. Shipments to China are holding up fairly well.

Walnut
Appalachians	KD	US$2220	No Change
	AD	US$1640	US$20

The furniture industry seems to have a growing interest in "grainy" woods, such as Ash. However, any increase in common Ash sales to domestic and Far Eastern furniture plants will probably be offset by a decrease in shipments to picture frame manufacturers. This industry is not doing well at the moment. The outlook for top-graded Ash is also not bright for the coming months. Sawmills have little incentive to cut Ash given the current deep prices. Supply and demand will probably stay in balance at a low level.
Overall production of Aspen is low due to limited demand for the common grades. However, Canadian mills are still producing large volumes of this wood.

As with several other species, Basswood production has declined over the last year to match the lower demand for this species. Basswood markets will shrink further as the production of Venetian blinds, shutters and other millwork products is shifting to overseas manufacturers. While foreign manufacturers may need some American Basswood, they are also using other species.

Depressed Beech prices are helping to stimulate the domestic demand of this wood, but the overseas demand suffers from the competition of less expensive and higher quality European Beech.

Hickory/Pecan usage in the cabinet, flooring and millwork production is steady. As Hickory is not suitable to be cut in the winter, the supply will decline a bit but this will not cause any significant shortages. Hickory seems to be gaining more popularity for kitchen cabinets to the detriment of more expensive species such as Hard Maple and Cherry.

Regional Differences

In the Northern region, log supplies - mainly Hard Maple - were fairly tight in January. KD lumber inventories are still adequate but green inventories are less abundant. Meanwhile, the return of cold weather in many areas has allowed forest crews to get back in the woods. Also, good Canadian supplies helped to counterbalance the shortage in the USA. Demand for Hard Maple, Red Oak and other staple species of the North is still lackluster.

Business activity across the South is slow but some faint improvements in the domestic demand can be observed. Millwork manufacturers led the pack in keeping the usage of top graded southern Red Oak at a decent level. Nevertheless, prices are under pressure because of an abundance of competitively priced Appalachian Red Oak. Some southern producers have curtailed production due to weak prices. Export sales of most species are very poor with the exception of White Oak. .

The business climate in the Appalachian region improved slightly so far this year. The domestic demand for top-graded Red Oak, Walnut and Cherry is picking up, above all for customized dimensions and green stocks. On the other hand, shipments of green common Hard Maple to flooring plants are stagnant. Exports are also showing some early signs of revival, notably for While Oak and Walnut.

 ( ITTO Reports )