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|Industrial Lumber Markets Update|
The “Perfect Storm” Rages On
By Hardwood Publishing Company
In 2014, North American hardwood sawmills have increased operating hours, upgraded equipment to boost hourly output, and added smaller mills dedicated to converting lower-grade logs into industrial products. Some new sawmills have opened, and others that had been shuttered have reopened. Consequently, U.S. hardwood lumber production is up 10% from last year and is now pacing at an eight-year high, according to our estimates. Grade lumber availability—which had been consistently tight for over a year—is now sufficient to meet demand for all but a handful of items.
However, higher production has not provided industrial lumber buyers with much relief from tight supplies. Many pallet manufacturers still lack for cants and cut-stock. Railroad tie markets remain vastly undersupplied. Frame stock buyers are reporting challenges finding material of decent quality. Slight cooling in frame stock markets in the summer and mat markets in the early fall narrowed the overall supply/demand gap for industrial lumber, but certainly didn’t close it, and that gap appears to be widening again.
Why has hardwood production failed to keep up with industrial market demand? And what is the near-term outlook for individual industrial markets? We will attempt to answer these and other questions, and also look back at the strong upward movements in industrial lumber prices seen in the last year.
Hardwood lumber availability for industrial markets has increased at a slower rate than overall lumber production in 2014 due largely to strong demand from competing domestic and international markets that pay higher prices.
Lumber purchasing by residential flooring and truck trailer flooring plants has increased this year, not only to support their stronger sales, but also to ensure the continued loyalty of suppliers being courted by purchasers of ties, mat timbers, board road and other products. The average price for green 4/4 #2&3A Common Red and White Oak rose $103/MBF (17%) from mid-October 2013 through mid-April 2014, before residential flooring manufacturers were able to roll back about one-third of the increase as production grew in the summer and early fall. However, with winter approaching and crossties now priced higher than flooring-grade Oak, they won’t hesitate to again purchase more aggressively should their lumber inventories begin to decline.
Consumers have become increasingly attracted to rustic flooring, moulding, cabinets and furniture. A fair amount of sound lumber that used to go into pallets or frame stock is now going to manufacturers of rustic products. In some species like Hickory and White Oak, “rustic-grade” lumber actually commands considerably higher prices than industrial products or #2 Common lumber, and sometimes even more than #1 Common lumber.
This comment from a sawmill owner that used to produce several loads of pallet cants per week illustrates the impact of these trends: “Because of rustic markets and the strength of #2&3A Common for flooring, we only develop one truckload of pallet cants per month.”
The average unit value of U.S. hardwood lumber exports was 13% higher during the first half of 2014 than during the same period in 2013. However, the Weekly Hardwood Review Kiln-Dried Index averaged 25% higher during the first half of 2014 than during the same period in 2013. Given that exports of high-value species climbed faster than overall exports, the “undersized” increase in export unit value was apparently not driven by shifts towards lower-cost species. Rather, it appears that foreign buyers shifted their purchasing mixes towards lower grades of lumber as prices escalated, which could very well be cutting into domestic availability of ties and other industrial items.
This summer’s bump in hardwood production failed to satisfy demand from industrial markets, which doesn’t bode well for supply prospects when production declines in November and December for hunting seasons and holidays. Add in modest economic growth and concerns about another polar vortex and you have a recipe for firm industrial demand and lumber scarcities throughout winter.
Weekly Hardwood Review prices for pallet cants—averaged across all regions—have climbed 15% in the last year. Pallet lumber prices have risen 16%. While pallet manufacturers managed to increase cant and cut-stock receipts this summer, many are already seeing supplies erode due to wet weather. In many areas, softwood material is neither cheaper nor more readily available than hardwood, so substitution has only provided limited relief. Consequently, industry-wide inventories are in no better shape today than at this time last year.
In the last few weeks, some pallet manufacturers reported large cant price increases, which suggests more increases may be coming to the overall market. Pallet producers have pushed their customers hard for price increases this year, and they will need to continue that push just to maintain current margins as cant and pallet lumber prices are likely to move still higher in the months ahead.
Railroads and treating plants initially resisted paying more for ties when mat and board road markets strengthened, but as their own demand climbed, they were forced to relent. The Railway Tie Association (RTA) forecasted that wood crosstie purchases would rise a total of 4.1% in 2014, and another 3.2% in 2015. Prevailing prices for 7” x 9” x 8’6” crossties climbed $180/MBF ($8.04 per tie) during the last 12 months, an increase of 33%. Crossties are now priced well above frame stock and cants, and have recently overtaken flooring-grade Oak.
Record purchase prices have helped treating plants become more competitive with other markets, but most are still low on ties. As such, many recently went into what one contact termed a “full-court press” to bolster receipts, including more price increases. In spite of all this, crosstie inventories remain about 10% lower than a year ago, according to the RTA, and every tie buyer that responded to RTA’s early October procurement survey reported current shortages and the expectation of shortages into the future. We would not be surprised if crosstie prices rose another $2-3 per tie by early 2015.
Mats and Board Road
Sales of mats and board road are prone to large fluctuations as enormous orders can suddenly materialize when oilfield or pipeline projects are approved—and just as quickly evaporate when projects are finished, delayed or cancelled. Markets for certain types of new mats have slowed partly because some large projects have been cancelled, and partly because relatively high prices have pushed buyers toward used mats, which are fairly abundant in some sizes.
The Energy Information Administration expects U.S. onshore oil production to increase by a total of 12% in 2014 and another 6% in 2015. As such, we believe overall demand for new mats and board road will keep growing despite short-term hiccups in some markets.
Prices for hardwood frame stock jumped $135/MBF from October 2013-April 2014 amid modestly stronger demand, higher plywood prices, and heavy competition from other industrial markets. Prices declined $50 in the second and third quarters as demand seasonally slowed, supplies loosened up, and plywood became more abundant. However, plywood supplies are tightening again and pushing customers toward solid wood. Solid hardwood frame stock should move well over the next two months, and prices are likely to firm up.
The Perfect Storm
“The perfect storm on the center of the log has lasted five years,” remarked one wholesaler recently. With residential flooring sales steady; truck trailer flooring plants flush with orders; rustic wood products in high demand; railroad industry requirements rising; U.S. onshore energy production increasing; and more pallets needed to support even modest economic growth, the storm will rage on into 2015.
Based in Charlotte, North Carolina, Andy Johnson is regional editor of the Hardwood Publishing Company. He can be reached via email or phone: 704-543-4408