U.S. Export Duties on Canadian Lumber to Cause Market Chaos and Soaring Prices

U.S. Export Duties on Canadian Lumber to Cause Market Chaos and Soaring Prices

New WOOD MARKETS five-year forecast calls for volatility in North America while global regions face whiplash as trade flows
are disrupted from export duties

Vancouver, BC, December 8, 2016

In WOOD MARKETS’ new five-year Softwood Lumber Chapter forecast, U.S. duties on Canadian lumber exports to the U.S. are expected to cause short-term chaos after they are announced in early Q2/2017. This new development alone completely changes all previous outlooks as a new approach to “managed trade” by the U.S. kicks off the 5th U.S.-Canada lumber war. The American position is to try and marginalize its largest competitor (Canada) by using elements of U.S. trade law that will allow the implementation of preliminary and prohibitive export duties.

These details and further analysis of commodity lumber and panels was released today in the report, WOOD MARKETS 2017 – The Solid Wood Products Outlook: 2017 to 2021 by International WOOD MARKETS Group, Vancouver BC.

The expected implementation of countervailing (CVD) and anti-dumping (ADD) duties on Canadian lumber exports to the U.S. will cause lumber prices to surge in 2017 and go even higher at various points over the next five years. The WOOD MARKETS 2017 Outlook has adopted a 25% combined export tax, but the final combined duty determination starting in Q2/2017 could be even higher.

In assessing the impact of export duties on Canadian exports to the U.S., WOOD MARKETS has run the report’s base case model at 25%, as well as three other duty scenarios: no duty (0%), 15% and 35%. These different model scenarios involve a full analysis regarding U.S. and Canadian production, imports, exports and consumption. “However,” indicated Russ Taylor, President, “the major gap in the WOOD MARKETS models is trying to find enough lumber supplies to meet projected U.S. demand around 2020, even at a 0% duty. When duties of 25% and 35% are considered, the question looms as to where the U.S. will get all of its lumber and at what price.”

The impact of U.S. export duties on Canadian lumber production and exports has

been developed from building a cost curve of Canadian producing regions from WOOD MARKETS new benchmarking report, Biannual Global Timber/Sawmill/Lumber Regional Cost & Revenue Profiles. From this, WOOD MARKETS has overlaid a cross-Canada timber supply availability map with delivered log and sawmill costs to determine which producing regions (and mills) are most impacted by 25% export duties. The projected results show that two regions in Canada will be impacted the most and mill curtailments and closures will occur, but only in the short term.

While the initial shock and impact of export duty rates of 25% will cause some initial chaos and mill curtailments in Canada, quickly escalating U.S. lumber prices will bring much of the curtailed production back online, but depending on the amount of the final duties. This trend becomes even more critical starting about 2019 when we forecast the first “supply gap”, as we don’t see enough other lumber supply being readily available to meet overall projected U.S. demand (at a conservative housing starts forecast) without bringing back more Canadian lumber imports. “This means that Canadian lumber will need high prices to increase exports to the U.S.,” commented Russ Taylor, “and starting in 2020, record-level lumber prices are forecast in the U.S. market.”

Some of the regional trends are summarized here:

  • As the export duties will hand U.S. mills a substantial cost advantage (at least before log prices rise to try and extract winfall), a surge of capacity expansions is expected that will allow American mills to dominate its home market. From near 32.9 billion bf in 2016, total U.S. output is forecast to increase by around 10 billion bf by 2021, depending on the initial duty rate – a whopping 6% average annual increase per year and a huge gain from managed trade. This forecasted production surge is considered to be very aggressive and difficult to achieve, but it is considered possible, given the improved competitive advantage of U.S. mills as lumber prices rise from the Canadian lumber imports that face a 25% (or higher) export duty.
  • Surplus Canadian lumber is expected to seek other markets and this could disrupt Asian markets, including Japan (diversion of home centre grade as incremental J-grade) and China (offering #2&Better SPF at lower prices in China to obtain equivalent return vs. the U.S. price net of export duties).
  • The B.C. Interior timber harvest will drop as the export duties marginalize sawmills processing some of the last economic mountain pine beetle-killed timber. This will cause B.C. Interior lumber production to drop with further sawmill closures expected.
  • A 25% export tax on high-value coastal lumber exports is expected to reduce B.C. Coast lumber exports to the U.S. due to many alternative species and products available at lower cost.
  • As the highest cost region in Canada, Eastern Canadian mills will have a difficult time absorbing export duties to the U.S., but by 2020, exports will accelerate to fill the U.S. “supply” gap expected.
  • European structural softwood lumber imports are forecast to ramp up dramatically to take advantage of the pending supply gap that will trigger higher prices, which is what European exporters need to enter and stay in the U.S. market. The magnitude of European softwood lumber imports is difficult to predict, but higher prices will attract huge volumes to the U.S.

In all four export duty scenarios (0% to 35%), U.S. production and European exports to the U.S. rise and Canadian production and exports fall. This results in the U.S. (and European) producers gaining in terms of their market share of U.S. consumption at the expense of Canada, and more as the duty rate rises.

Given the positive outlook for the U.S. housing market over the next five years coupled with U.S. exports duties starting in Q2/2017, a surge in U.S. lumber prices is forecast – smaller in 2017 and then a larger price gain in 2018. Starting later in 2019, we expect a growing shortage of incremental lumber that will require Canadian lumber exports to the U.S. to increase slowly and steadily thereafter, mainly from Eastern Canada. By 2020, it is expected that North American logging and sawmilling capacity will start to lag with overall U.S. lumber demand, and coupled with steady increases in demand and punitive export duties on Canadian exporters – this should allow lumber prices to soar starting in 2020 and beyond. Did somebody say, “super-cycle?”

Full details of the five-year outlook for the U.S. and Canada’s lumber and panels consumption, imports, exports, production and price trends are available in WOOD MARKETS 2017 – The Solid Wood Products Outlook – 2017 to 2021.