Look for prices of just about all types of lumber products to rise over the next two years to rise in consort with improvements in the home construction and remodeling markets, staffers at RISI predicted Sept. 29.
The information provider for the global forest products industry did just that at RISI's annual North American Conference, held this year in Chicago. Here are key takeaways from the opening day.
- "The [softwood] lumber market is approaching a demand level we haven't seen in a decade," David Fortin, senior economist for wood products, told attendees. "The demand-capacity ratio will rise to near 90% in 2017. "By 2017 lumber markets are expected to be extremely tight, with higher prices."
- Consumption of U.S. softwood lumber, which bottomed out at around 33 billion board feet in 2010, should hit roughly 50 billion feet in 2017. Add in Canadian consumption and exports and the total will reach 65 billion board feet.
- North America's softwood lumber capacity "will grow slightly more than creep," Fortin said. As a result, demand will surpass 80% of capacity--a key benchmark--this year and trend higher through 2017. North American mills' capacity should total about 72.7 billion board feet in 2017.
- Softwood lumber prices will trend higher with increased volatility, Fortin said. Profit margins will vary by region, with West Coast mills particularly challenged by higher prices for fiber.
- EWP's demand/capacity ratios, which were about 50% for I-joists to 55% for LVL in 2009, should climb by 2017 to about 87% for i joists, 95% for LVL. That demand will increase costs, as will a need to raise prices for I-joists because the materials used to make the product will get more expensive.
- "LVL profitability has been flat since 2013," Honeyman noted. "Rising input costs will press down profitability, but higher demand/capacity ratios mean you should be able to pass along some costs to customers." Meanwhile, I-joist profitability is at historical highs, again because of input costs. When those input costs rise, he said, profitability will drop some but still be above historic averages, again because of market tightening.
- Even as consumption of softwood lumber for new-home construction grows, the repair and remodeling market will stay ahead, Fortin said, in part because RISI expects the mix of R&R projects will tip more toward additions and remodels, both of which use a lot of wood.
- Softwood lumber exports, which accounted for 12.5% of North American mills output in 2010, will decline through 2017, at which point it will figure in about 7.5% of the mills' output.
- Futures prices for softwood lumber are about 12% lower than recent spot prices. RISI economists said this suggests that there's wide belief that this month's expiration of the Softwood Lumber Agreement will prompt Canadian mills to send a "wall of wood" south of the border, thus depressing prices. That won't happen, Fortin said: "It doesn't make sense that the Canadian will sell wood at a loss. It doesn't work to their advantage to flood the market." In fact, once people realize there won't be such a wall, prices could rise sharply, they added.
- America has pent-up demand involving 2.6 million households that normally would be formed if tight lending standards and other economic conditions weren't holding them back, Bob Berg, a principal economist at RISI, said. He predicts strong and steady increases in the need for shelter averaging about 1.5 million units per year to 2020, while household formations will average around 1.1 million. "We've gone from a boom to a bust, and now we're in a crisis," he said. "If housing starts don't get up to 1.6 million, we're going to see this problem evolve."
- OSB producers "are really struggling with excess capacity," Jennifer Coskren, a senior economist, said during another presentation. Nevertheless, prices will trend upward because of housing gains, she said, with OSB prices being more volatile than those for plywood.
- In general, sales of structural panels are up 32% from their low in 2009 and they should climb another 16% over the next two years, she said. OSB demand will rise faster than demand for plywood because OSB is more closely tied to housing while plywood's No. 1 customer is the industrial sector.
- Expect tighter price spreads between plywood and OSB, Coskren said. OSB's discount to plywood has been as high as 55% in mid-2014. That gap should shrink to about 20% as housing increases, the current oversupply of OSB production capacity goes away, and OSB prices rise.
- Demand for engineered wood products (EWP) is recovering. usage rates are improving, and the demand/capacity ratios are at their highest levels since 2005, Steve Honeyman, an RISI economist, told the group.
- EWP demand has recovered from cyclical lows but remains below pre-crash levels. Demand for I-joists remains dependent on new home construction. In contrast, demand for laminated veneer lumber (LVL) is driven by the multifamily business.
- Higher lumber prices and restricted supplies of lumber in wide dimensions will encourage a move toward I-joists in place of solid-sawn wood, Honeyman said. Increases in the numbers of multistory, large-scale wood construction buildings will boost demand for all types of EWP, with one caveat: New fire codes could limit sales of I-joists in home construction, or else increase the cost of the product because of the need for fire-retardant coatings.