The impact of U.S., Canadian and offshore markets
on the softwood lumber industry in 1996 and 1997

by Doug Smyth,
National Research Director,
I.W.A. CANADA

ecent media articles have assert-
ed that the U.S.-Canada lumber
trade agreement will have a dev-
astating impact on the British Co-
lumbia and Canadian softwood
lumber industries. According to
those articles, new markets will
have to be found for 2 billion
board feet (BBF) of Canadian lumber which was
shipped to the United States in 1995. Nothing
could be further from the truth. Both the numbers
and the analysis are incorrect.
U.S. SOFTWOOD LUMBER MARKET

Since early March, 1996 the boom in the U.S.
softwood lumber market which was predicted in
Doug Smyth’s comprehensive 1996 study has con-
tinued to heat up. As of August 30, 1996 the price
of western Spruce-Pine-Fir (SPF) 2x4’s reached
$424 (U.S.) per thousand board feet — $154 or 57
percent higher than the year-earlier level. The cur-
rent price is not far from the previous high of $466
set in December of 1993, when intense speculation
pushed up prices well beyond what market funda-
mentals should have generated.

Following a brief lull in early October, which
normally accompanies the end of a quota year cal-
endar quarter under the U.S.-Canada lumber
agreement, U.S. prices surged again during the
second half of the month. The price of western
spruce-pine-fir 2x4’s jumped by $43 (U.S.) per
thousand board feet to $425 per thousand. That
represents a rise of roughly $200 (U.S.) per thou-
sand board feet over the price one year ago.

The robust market is based partly on a signifi-

cant rise in U.S. single-family housing starts. Dur-
ing the first 9 months of 1996 the actual number of
singles started jumped by 86,200 units over the
1995 year-to-date level. That increase alone gener-
ated demand for an additional 1.2 billion board
feet of softwood lumber. Both results are closely
in line with the forecasts made by research direc-
tor Doug Smyth in his comprehensive 340-page
study of North American timber supply and soft-
wood lumber production during 1996.

However, the rate of increase in single-family
starts has tapered off since the 24,000 unit jump
between April of 1995 and April of 1996. By Sep-
tember there was no increase over the number
started a year earlier. At year-end the increase
over 1995 full-year single-family starts should be
close to 80,000 units. As a result, total singles in
1996 will reach 1.16 million, just below the 1.2 mil-
lion that were started during the 1994 boom year.

U.S. TIMBER SUPPLIES

In spite of the flattening of the U.S. housing mar-
ket during the second half of 1996, lumber prices
will continue to be strengthened by the serious
shortfalls in U.S. timber supply. Plunging harvests
from federal, state and private lands in the U.S.
West caused softwood lumber production to plum-
met by 1.8 billion board feet between 1994 and
1995. In spite of the robust conditions in the first 9
months of 1996, particularly in the revived Califor-
nia market, western states lumber output barely
exceeded same-period 1995 levels. As a result, un-
til recently major U.S. wholesalers were not able
to find U.S. West Coast Douglas-fir lumber, even at
high prices.

At the same time, production in the U.S. South
also just inched ahead of 1995 output because of
intense competition for available timber supplies.
The so-called “woodbasket of the United States”
has now reached the absolute limits of regional
timber supply because of the extreme overbuild-
ing of manufacturing capacity which has taken
place, including sawmills, pulp mills, and plywood
and OSB plants. As a result, softwood lumber pro-
duction dropped from the record 15.0 billion
board feet set in 1994 to 14.7 BBF in 1995. In spite
of high levels of demand in 1996, lumber output is
predicted to rise by just 151 million board feet to
less than 14.9 BBF.

Because of the continuing declines in the West,
total U.S. production is expected to fall by 400 mil-
lion board feet to 31.3 billion board feet between
1995 and 1996. When 450 million board feet of
“natural withdrawals” of Canadian lumber exports
to the United States in order to feed reviving do-
mestic and offshore markets is taken into account,
the U.S. will experience an initial shortfall of

roughly one billion board feet during 1996. The ex-

e The strong market for Canadian lumber shipments is based, in part, on a significant rise in the number
of single-family housing starts in the U.S. which has generated an additional demand for 1.2 billion board
feet of softwood lumber.

istence of that shortfall explains the dramatic
surge in U.S. softwood lumber prices from March
through September, 1996.

Lumber prices continued to surge during the
summer, a period which is normally characterized
by seasonally lower returns. Even though lumber
imports from Canada during the first half of 1996
jumped by roughly 500 million board feet over the
record 1995 level, the U.S. market continued to
heat up. Such a high level of imports would have
depressed prices if it had not been for the serious
timber supply crisis in the U.S. West, and the cap
on fiber availability in the South.

Moreover, there are no signs of imminent col-
lapse in the U.S. market. Wholesaler and retailer
lumber inventories are lean, in large part due to
the widespread practice of just-in-time buying
from the sawmills. In addition, weak pulp and pa-
per markets have finally resulted in large surplus-
es of residual chips in Eastern Canada and the U.S.
South. Because sawmills will be unable to dispose
of their chips, lumber production in those regions
will slow during the last 2 months of 1996.

And finally, although the rate of increase in ac-
tual single-family housing

ning in March, 1996 represents the shortfall in
North American timber supply and not the impact
of the U.S.-Canada lumber agreement, which be-
came effective on April 1. During the April to June
period imports from the 4 covered provinces of
British Columbia, Alberta, Ontario and Quebec al-
most equaled the record level set during the sec-
ond quarter of 1995. For the full-year 1996, U.S.
lumber imports from all Canadian provinces are
predicted to total 16.5 billion board feet, just’450
million board feet less than the record 16.950 bil-
lion board feet which was shipped in 1995. Some
of the difference has been absorbed by the Canadi-
an domestic market, where single-family housing
starts are expected to rise by 16,000 units from the
depressed 1995 level. At the same time, British Co-
lumbia Interior sawmills have been able to step up
shipments to Japan because of the growth in 2x4
platform frame housing construction. During 1996,
2x4 starts will jump to the 100,000 unit level. As a
result, the U.S.-Canada lumber trade agreement.
will have little impact on B.C. and Canadian lum-
ber production in 1996. And the volumes of U.S.
lumber shipments from the non-covered provinces

of Saskatchewan, Mani-

starts will flatten for the
rest of 1996, they will re-
main healthy. Moreover,
member surveys carried
out by the National Asso-
ciation of Homebuilders
reveal some softening in
prospects over the next
few months. However,
there will be no sudden
collapse of the U.S. hous-
ing market. Instead,
there will be a flattening
of 1996 singles starts to
close to the 1995 monthly
levels.

In spite of the flattening of
the U.S. housing market
during the second half of
1996, lumber prices will

continue to be strengthened

by the serious shortfalls in
U.S. timber supply

toba and the Maritimes
will be completely unre-
stricted. Together during
1995 they accounted for
936 million board feet of
the 16.95 billion board
feet of total Canadian
imports into the United
States.

During each agree-
ment year the 4 covered
provinces of British Co-
lumbia, Alberta, Ontario
and Quebec will be lim-
ited to a total of 14.7 bil-
lion board feet of tax-
free exports to the U.S.

At the same time, lum-
ber prices will continue
i, be strengthened by U.S. timber supply short-

es.

: During 1997 western states supplies will remain
tight because of growing environmental restric-
tions on harvests from federal, state and private
lands. Some of the 1996 federal timber sales were
provided by emergency salvage legislation which
permitted waivers of some environmental restric-
tions. However, the legislation failed to generate a
significant rise in 1996 harvests. On December 31,
1996 the legislative authority for the salvage law
will expire and there is no chance that Congress
will renew it. As a result, the United States will re-
main heavily dependent on imports of Canadian
lumber. And prices will continue to reach higher
levels than would have been expected based on
consumption alone.

THE U.S.-CANADA LUMBER TRADE AGREEMENT
The dramatic increase in lumber prices begin-

The first rae
runs from April 1, 1996 through March 31, f
The Easement also provides for additional tax-
free quota of 92 million board feet for each quarter
that the average price of eastern spruce 2x4 lum-
ber exceeds $405 (U.S.). Because of high lumber
prices, during 1996 the triggered quota has aire)
generated an additional 184 MMBF, bringing the
total to 14.9 billion board feet. The agreement also
permits the 4 covered provinces to ship an addi-
tional 650 million board feet per year upon the
payment of a $50.00 (U.S.) per thousand board
foot fee. Because eastern Canadian wood costs
are currently less than one-half of the levels in the
B.C. Interior, most regional sawmills will pay that
fee. Even in British Columbia, the average cost of
the tax-free and $50.00 shipments will be just $7.00
(U.S.) per thousand board feet, much less than the
recent typical weekly jump in U.S. lumber prices.
As a result, total imports from the 4 covered
Continued on next page

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8&/LUMBERWORKER/NOVEMBER, 1996