The US Lumber Market in Spring 2002

‐2002.04.22／

Nevertheless, secondary wood products manufacturers remain in a cost-cutting mode. In an effort to keep their stocks lean, end-users of lumber are shifting the inventory burden to their suppliers. Many furniture and cabinet companies that traditionally purchased full truck-loads of lumber are now ordering smaller quantities at more frequent intervals. Furthermore, special requirements in regards to length, width, color and package size are more common and suppliers have to do much sorting to meet their clients' requirements. This is creating new business opportunities for middlemen who are increasingly performing the function of stock piling and fine-distribution to end-users. Lumber distribution is moving away from sawmills towards lumber wholesalers, distributors and retailers.

The housing market remained a vibrant segment in the US economy throughout the recession, and this industry has not ceased to purchase sizeable quantities of structural lumber. The short decline in residential construction following the September attack on New York has been counterbalanced by a strong catch-up demand during the first quarter of this year. In addition, low mortgage rates provided a boost to housing. Driven by a sharp gain in single-family homes, new home starts in February rose 2.8 percent to a seasonally adjusted annual rate of.1.769 million units, the highest since December 1998. Conditions may further improve as housing usually experiences a cyclical increase in the spring and summer. Lumber suppliers are now stocking up their inventories in anticipation of more sales to this industry in the months to come.

Stair and millwork shops benefit from the busy house construction activity. The same applies to kitchen cabinet manufacturers who are becoming more confident about their business prospects. Hickory cabinets have been very popular recently but it is not sure whether this can be sustained.

In spite of the strong housing activity during the last two years, furniture sales have been relatively weak. Analysts at AKTRIN believe that some modest, pent-up, demand will emerge once the economy gathers steam. Some furniture companies are boosting production so that they can fulfill the expected rise in consumption. Lumber inventories at furniture plants are relatively low and manufacturers will have to make some purchases in order to replenish their raw material stock.

Sales of strip-flooring is strong. Nevertheless, prices remain soft due to an abundant supply of hardwood flooring products from a great many of competing producers. While inventories are still adequate, some manufacturers are experiencing declining wood stocks. They will have to step up their purchases of lumber, mainly green/air-dried Red Oak and to a somewhat lesser extent Hard Maple.

In an effort to enhance efficiency, more and more secondary wood products manufacturers are becoming more specialized and confine themselves to components and parts to be supplied to furniture and cabinet plants or the export market. The health of the wood components industry is closely tied to the health of the furniture industry. Business declined throughout most of 2001 and many component making companies have vanished. The industry is now made up of fewer - but larger and stronger - players. With the revival of the furniture industry, wood component sales are also improving but low cost overseas competition remains a formidable challenge. Successful domestic manufacturers will have to offer better service and products that more closely match their clients' specifications.

Demand for low graded lumber is still weak, with the exception of railroad ties. The upholstered furniture business has been better lately but sales of hardwood frame stock is not likely to improve as plywood and other engineered wood products are encroaching on the market share of traditional hardwood frames. Sales of wood-chips are suffering due to low demand from paper mills.

While export markets will improve in the months to come, the recovery is likely to be slow. Some renewed interest for North American woods can be observed from Chinese buyers. Shipments of North American lumber to Europe may also improve moderately. The continent is pulling out of the recession, above all Germany, the biggest economy in Western Europe. Business in Italy - the country with the largest furniture sector in Europe - is also getting better. On the other hand, American lumber exports to Mexico are suffering as this country's furniture industry is being decimated by fierce competition from Asia.
The strong dollar has resulted in an enormous competitive disadvantage for the North American forest industry according to American Forest & Paper Association (AF&PA). The president and CEO of AF&PA is on record as saying that a weakening of the dollar by about 25 to 30% would be desirable. The strong dollar has resulted in a marked weakening of export sales in addition imports have become cheaper and this is affecting domestic sales. The resulting loss in market share on domestic as well as on export markets has caused numerous mill closures and a loss of jobs. It has been estimated by the AF&PA that, in the past five years, around 32,000 jobs have been lost in the forest industry. To improve the competitiveness of US companies the AF&PA requested the US government to consider appropriate fiscal measures.

During the past year, most lumber mills have not been profitable. Higher log prices, low demand and low prices for cut lumber, rising insurance costs, higher wages and more governmental regulations have all contributed to this fact. As a result, many logging and lumber companies have closed down or curtailed production. For many independent landowners prices have not yet reached a high enough level to step up their logging activities. Similarly, many sawmills are unwilling to process logs that cannot be sawn into lumber at a profit. Stocks of timber and lumber are still dropping. On the positive side, the downscaling has alleviated the decline of lumber prices. While the down-sizing has abated now, it has not yet ended. Many plants are still reducing their operating hours or are closing down.

So far, the overall wood supply is still adequate - above all for green lumber - to meet the revived demand. However, inventories of kiln-dried lumber are melting down and prices of the more popular species have started to rise again. This is a very welcome development for sawmill operators, many of whom have been suffering losses during the past year. The more efficient sawmills should now be able to operate again at a profit.

Demand, supply and price movements vary significantly between different species, quality grades, drying levels, and growing regions. Below, are listed 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 Tropical Species

South American exports of Mahogany are still sufficient to meet the demand in North America in spite of the fact that some exports have been curtailed and new supplies are unlikely to emerge. Prices are expected to remain stable. The market for African Mahogany is driven by similar forces.

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

Temperate North American Species

The demand for the upper grades of Red Oak is fairly good. Nevertheless, the overall supply of Red Oak exceeds the demand at the present time, above all in regards to common, kiln-dried stocks This oversupply should become less pronounced if export markets improve. Green lumber inventories at flooring plants are lower than normal.
Some replenishing for green and kiln-dried lumber must be anticipated in the months to come. Green lumber prices in the Appalachian region are already rising.

Red Oak
Northern Region	KD	US$1610	US$10
	AD	US$1270	US$20
Southern Region	KD	US$1290	US$15
	AD	US$980	US$10
Appalachians	KD	US$1475	US$20
	AD	US$1148	US$5

White Oak
Northern Region	KD	US$1205	No Change
	AD	US$805	No Change
Southern Region	KD	US$1100	US$20
	AD	US$805	US$0
Appalachians	KD	US$1220	US$30
	AD	US$923	US$13

The American demand for White Oak is lackluster and little change is expected anytime soon. The European demand for North American White Oak is improving. Nevertheless, competition from other supply regions and substitute species is fierce and prices are likely to remain flat. Due to currently depressed prices many sawmills are abandoning this species. If this trend continues the supply may become tighter and prices may start to rise.

The demand for high-graded Cherry is fairly good. As production of this species remains subdued, some items - such as long lumber - is becoming tighter. On the other hand, short stocks are still in a state of oversupply. In response to current demand trends, Cherry log processing is shifting away from veneer to lumber. Sales of common Cherry may also increase slightly since manufacturers have depleted much of their inventories.

Cherry
Appalachians	KD	US$3090	US$10
	AD	US$2425	No Change

Hard Maple
Northern Region	KD	US$2225	US$10
	AD	US$1775	No Change
Appalachians	KD	US$2020	No Change
	AD	US$1680	US$30

Sales of Hard Maple of all quality grades will probably remain slow. Hard Maple production exceeds the demand from flooring plants. In response, some sawmills are lowering their output. We may see a slight increase in sales of common white stocks later this spring.

Compared to Hard Maple, the demand for high graded Soft Maple is somewhat better, above all for the upper quality grades. The ability to meet clients' color specifications becomes increasingly important. Demand of "Wormy Soft Maple" is low but the supply is abundant.

Soft Maple
Northern Region	KD	US$1380	US$10
	AD	US$970	No Change
Appalachians	KD	US$1395	US$10
	AD	US$1090	US$15

Walnut
Appalachians	KD	US$2260	US$10
	AD	US$1690	US$25

Walnut has been one of the most sought-after species recently. While demand is no longer increasing, it remains strong at a high level. Many Walnut producers have difficulties filling their orders for some of the more popular items. It is not likely that the supply shortage will alleviate in the near future. Walnut prices are still rising.

Yellow Birch sales have been fairly good lately. High-quality Yellow Birch is widely used for kitchen cabinets which are now in high demand due to the normal seasonal upswing in housing construction. Buyers are increasingly requesting specified colors, in particular Sap White Yellow Birch.

North American Beech wood is not in very high demand at the present time. A revived interest for this wood in Europe is not anticipated in the near future.

Hickory/Pecan is one of the few species for which demand is exceeding supply, above all for the common grades. Hickory trees are relatively scarce and difficult to saw. Therefore, it is not expected that production will increase enough to cover the shortfall.

The demand for top-graded Ash is weak and likely to stay so. Ash is competing against Red Oak and White Oak which are in good supply and relatively inexpensive. Sales of common Ash are somewhat better, largely due to the popularity of grainy woods in the Far East.

Aspen is used largely for panel production. With the increased building activity during Spring and Summer, Aspen sales are bound to improve. Nevertheless, the supply is large enough to keep price advances in check. Furthermore, Aspen is facing stiff competition from Poplar.

Business conditions for Poplar look fairly good. The demand for the common grades is improving from China, and more recently also from Italy. However, unless producers show more restraint prices will remain low.

Sales of Basswood improved which may be related to quality problems with imported substitute species.

Regional Differences

The Southern region is the hub of American furniture production. The furniture industry has not yet participated in the economic recovery. However, with wood inventory levels low, some furniture manufacturers are now staring to replenish their stocks in anticipation of better times later this year. In many areas of the South, heavy rain has slowed logging, creating a shortage of logs. Wood prices are moderately increasing. Lumber exports to Europe (Germany) were up recently, but sales to Mexico remain lackluster.

There is more optimism in the lumber industry of the Appalachian Region. Nevertheless, demand of the region's staple species - Red Oak - is still below normal, above all the common grades. Export orders of White Oak and Walnut picked up a bit, mainly for the upper grades.

As elsewhere, sales in the Northern Region improved but inventory levels are still sufficient to meet the demand.

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