The U.S.-Canada Softwood Lumber Agreement (SLA), which went into effect Nov. 1, is unlikely to shake up pro dealers' businesses or a market currently oversupplied with low-priced wood. Dealers say the stability and predictability in prices and supply that advocates promised this pact would usher in will be delayed until the severity and depth of the recent housing downturn reveal themselves more clearly.
As the housing market softened–and in some markets crashed–in 2006, lumber and panel producers on both sides of the border closed mills last fall, coincidentally around the time the ink was drying on the SLA. Those closings, along with recent overtures by the NAHB to European lumber suppliers about increasing exports to America, make some dealers anxious about their access to affordable lumber. Those events also provide dealers with a platform for renewing their plea for state and federal governments to open more forests to timber harvesting.
Coming to Terms
Canada's signature on a pact–whose shelf life is expected to last seven to nine years–that potentially restricts its trade and makes its lumber less competitive didn't sit too well with exporters or pundits, especially one provision that imposes a tax of up to 22.5% if exports "surge" beyond a specific volume based on monthly U.S. consumption for the prior year. "The Americans, naturally, were conspiring against our industry. But in a weird twist, our government has been helping them," wrote columnist Gordon Gibson in the Toronto Globe & Mail.
Some American dealers think Canada got jobbed, too. "Our tariffs have consistently been found to be illegal, and I can't believe we're doing this to a valued trade partner," says John Dangerfield, lumber buyer for seven-location Jaeger Lumber of Union, N.J.
Dangerfield is among the dealers who think the trade pact might eventually create a somewhat higher floor for lumber prices, "which from a purely selfish standpoint would be a good thing for business," he says, after a period when lumber prices had approached 10-year lows. In this environment, Ganahl Lumber of Anaheim, Calif., is favoring mills and reloads that provide better-quality wood because "we have to stay away from lumber that's going to sit," says lumber buyer Rex Klopfer. But none of the dealers contacted for this article planned to significantly alter their buying in anticipation of supply or price shifts in either direction. "Historically, tariffs and trade agreements have had a minor effect on supply and prices in the short term," says Mitch Wagner, director of commodity purchasing for Eighty Four, Pa.?based 84 Lumber. "After a while people understand the new rules and start playing again."
Quent Ondricek, vice president of lumber and building materials for Do it Best Corp., the Fort Wayne, Ind.?based dealer-owned buying group, echoes comments from dealers when he identifies two factors that could shift lumber prices and supply in the future: any sudden upturn in housing demand (which many large production builders say is unlikely before 2008) or major curtailments in production, "well beyond what's already happened," says Ondricek.
Several producers finally bit the bullet last fall and closed numerous plants to reduce their capacities. "When Abitibi says that it's closing four mills 'indefinitely,' that means something," says Wagner. Pat Quinn, an analyst with Vancouver, British Columbia?based investment firm Salman Partners, told CanWest News Service that 7 billion board feet of production needed to be taken out of the North American market, the equivalent of about one-quarter of Canfor's total annual production.
This combination of mill closings and a trade agreement designed to potentially cap Canada's exports led the NAHB–whose members account for about 80% of new-home construction in the U.S.–to conclude that the housing industry needs alternative lumber sources to ensure its own prosperity. The association sent envoys to Sweden and to Russia, where they offered to exchange information about America's home building technology for a boost in wood products exports. "The U.S. is overly reliant on Canadian imports to meet its lumber needs [and] we are reaching out to you to correct this problem," Jerry Howard, the trade group's CEO, told his Russian hosts.
Canada's lumber suppliers are expected to cut back production over the next decade. And Wagner thinks that years of bullying by the U.S. might finally push Canadian producers to explore international markets more aggressively. But Anderson views the NAHB's mission to Europe as being less about supply and more about the enmity that has long existed between builders and lumber producers. His newsletter called that mission "a thumb in the eye of U.S. and Canadian mills now struggling to sell what they produce at historically low prices." The newsletter noted, too, that European supplies have shown "little loyalty" to U.S. markets, and slowed their shipments the minute those markets stumbled.
Wagner says 84 Lumber buys less and less from Europe, primarily because prices those suppliers command are up to 33% higher than domestic wood. Other dealers are again urging the U.S. to draw more heavily on its own lumber resources. "I think it's morally unconscionable that we force the society to seek sources from other places," says Mike Fritz, president of Rugg Building Solutions in West Hatfield, Mass., which purchases most of its framing lumber from Europe because, he says, its quality fetches a premium from willing buyers. "Closing off some forests is entirely justified, but there could be a much higher sustainable yield in this country."
Until that happens, the last thing Fritz or any other dealer wants is less lumber coming from Canada. He fears that if that source diminishes, independents like his company will be forced to scramble as "the big users like Stock [Building Supply] and [The] Home Depot grab all that's available."
–John Caulfield is a contributing editor for ProSales.