Western timber, log markets on shakey ground as housing starts remain slow
BEDFORD, MA, Sept. 3, 2010 (RISI) - The first half of 2010 saw western timber markets begin to recover after hitting historical lows in mid 2009. The upturn was fueled by optimism in domestic housing markets and strong export demand from Asian markets. In June, when the first time home-buyer credit expired, new home starts fell further than predicted. Things continued to get worse, culminating this week when the lowest seasonally adjusted housing start numbers in more than a decade were released. Housing starts fell twice as fast as the National Association of Realtors had originally predicted. In response, many lumber and panel buyers reduced inventories and some producers have been forced to close shop. Inventory reduction made its way upstream to timber companies in July.
According toRISI's Log Lines, in the West delivered Douglas fir #2 saw log prices fell nearly 8% over the past two months. Preliminary reports indicate that trend will continue, with prices dropping another 5-8% in August. In response to the low prices, timber companies have not been actively bidding at state timber sales. Last month, the state of Washington offered 13 blocks of timber at auction; only six of those blocks received any bids. When markets are strong, nearly every stand receives bids. When the results of today's state auction sales are released, it might be surprising if any tracts received bids. One log buyer worried that "if no one buys any timber now, they may not be able to get roads built in time to harvest this winter." If such a situation does occur there is the potential for a log shortage this winter.
Meanwhile, the lone stabilizing factor in Western timber and log markets is export demand. Export volume remains strong, with one company reporting that it is shipping to China "at capacity." Exports to Korea are expected to increase as well. Asian importers are happy to capitalize on low domestic demand and falling prices. Even with the Chinese government implementing policies to control economic expansion and reduce inflation, expect Asian demand to stay ahead of port capacity. Nevertheless, it is unlikely that this sector will keep prices from falling; expect exports to merely moderate falling prices.
Considering the improbability of a quick rebound in domestic housing markets, timber prices will likely remain on a downward trajectory. However, when demand for logs does turn, the lean inventories being held throughout the domestic supply chain increase the likelihood that a shock to the market could result in a temporary price spike.
Seth Walker is editor of RISI's Log Lines; a monthly publication that tracks delivered logs prices in the Pacific Northwest.