Understanding the market impact of duties on Canadian lumber exports to the US

With the expiry of the U.S.-Canada Softwood Lumber Agreement, the outcome of what is next features two main potential options. The impact of probable duties on Canadian lumber exports to the U.S. is one option and this will be a game-changer for different producing areas, and especially depending on the amount the initial duties will be and how much is passed on to the market. Punitive duties will simply raise the price of lumber in the U.S. to the point where enough lumber from Canada is shipped to the U.S. in combination with imports from Europe. Essentially a new “floor price” will be established with less total imports and increased U.S. lumber production.

Or, the other option could be a volume-based quota that is imposed to limit annual, quarterly or monthly Canadian shipments to the U.S. In peak demand periods, a quota would hold back Canadian lumber exports or else very punitive penalties would be imposed on excess volumes. As Canada’s share of the U.S. soft wood lumber market has averaged about 31% from 1995-2015, a 1% drop is close to 500 million bf. Some U.S. proposals are rumoured to be setting a quota on Canada’s market share of U.S. consumption at 22%. In 2015, U.S. imports of Canadian lumber were 13.1 billion bf (29.5% of U.S. consumption). A 22% quota would suggest an immediate drop of Canadian lumber imports to the U.S. of some 3.5 billion bf, or 10% of total Canadian production! This severe scenario makes little sense, as where the U.S. get its lumber in the short term? I suppose that is not the concern of the American side as long as lumber prices (and log prices) go through the roof and create a windfall for U.S. mills and timberland owners.

As WOOD MARKETS has reported a number of times in its global benchmarking reports, U.S. South mills are already achieving the highest sawmilling margins in North America (and the world). “It is difficult to understand how the U.S. South, which is the largest producing region in North America, could have any specific complaints on Canadian lumber shipments, or shipments from any other region,” stated Russ Taylor, President. “The argument is different in the U.S. West, as the impact of strong log export shipments to China and Japan and generally tighter domestic log supplies have limited production and margins at sawmills since the U.S. West has the highest delivered logs in North America – some 70% higher than in the US South.” Throw in the 15% devaluation of the Canadian dollar vs. the U.S. dollar and the U.S. West industry is looking for a way out, even though the provinces of B.C. and Quebec have had long standing timber sale programs that tie stumpage rates to market log prices.

It is now possible to better see and understand the cost impact of export duties on Canadian lumber exports and potential lumber prices from two WOOD MARKETS reports. The new Biannual Global Timber / Sawmill / Lumber Regional Cost & Revenue Profiles Report provides quarterly costs, revenues and margins for 20 producing and export regions. For the major regions, the delivered lumber production and logistics costs delivered to the U.S. South are profiled, where the U.S. South is clearly the highest margin region. Delivered costs from Western and Eastern Canada are compared at different export duty rates, where both regions’ top-quartile mills become marginalized at just a 12.5% export duty and where they have the lowest delivered lumber margins to the U.S. South. Without higher lumber prices, the higher cost (or ”typical”) sawmills in Eastern Canada will start to run at a loss and some will immediately curtail. At higher duties of 25%, Canada becomes the highest cost supplier to the U.S. South. Higher lumber prices will be required to keep Canadian mills in the game to offset part of the duties, so what does all mean? The recently released Regional Quarterly Profiles Report shows the point at where other supplying regions start to become more profitable with export duties in effect on Canada. “Surprisingly,” said Russ Taylor, “Canadian duties do not just benefit U.S. West mills, but various European countries improve their cost competitiveness in the U.S. market in combination with their lower currency exchange rates. In fact, the lowest cost suppliers after the U.S. South are various European countries at a 25% Canadian export duty, given the high log costs in the U.S. West!” The Regional Quarterly Profiles Report outlines that these higher costs for Canadian mills will translate into higher lumber prices to allow European exporters to fill the gap left by Canada. Of course, all U.S. mills will benefit from this windfall of Canadian duties.

So, what will be the reduction in Canadian lumber export volumes to the U.S. at different duty levels? This question will be answered by WOOD Markets 2017: the North America 5-Year Outlook to 2021, as Canadian shipments to the U.S. will drop due to duties or a quota. The other question to be addressed is: what is the export market potential for Canadian lumber at various duty levels? This leads to another question: what is the market potential for Canadian lumber in China as U.S. duty levels increase, and how effective can China become as an outlet for incremental volumes? Based on WOOD MARKETS’ recent field investigations in both China and Russia, including a clear view on Russian exports and costs, China could become a battleground for market share, but at lower prices. As the U.S. can only produce about 65-70% of its own lumber demand, and with Canada’s market share in the U.S. dropping further, the way is paved for more imported lumber from Europe, Russia and other countries – and at higher prices. Based on the quarterly cost details and potential export duties on Canadian lumber from the Regional Quarterly Profiles Report, the WOOD Markets 2017 5-Year Outlook will provide three scenarios that will show the huge impact that U.S. trade law will have on lumber prices and import volumes in 2017 and beyond.

The Q3-2016 edition of the Biannual Global Timber/Sawmill/Lumber Regional Cost & Revenue Profiles (with current-quarter cost profiles of 20 countries/regions) benchmarks delivered log costs, sawmilling costs, lumber and by-product revenues, and EBITDA margins annually from 2010. The report also provides quarterly results starting in Q1-2015 to Q3-2016 for 20 producing countries and/or regions around the world for both “average” and “top-quartile” sawmills. The report also profiles delivered lumber costs to the U.S., China and Australia from key supplying regions to show which country is the low cost supplier. This report is now available by subscription every six months – as a single copy or as an annual subscription (2 reports per year). See: https://www.woodmarkets.com/publication/global-cost-benchmarking/benchmarking-quarterly-update-2016h1/

Full details of the five-year outlook for the U.S. and Canada’s lumber as well as panels (OSB, plywood, MDF and particleboard) for consumption, imports, exports, production and price trends are available in December for WOOD Markets 2017 The Solid Wood Products Outlook – 2017 to 2021. See: https://www.woodmarkets.com/publication/5-year-outlook/outlook-to-2021/ Note that Early Bird prices are available only until October 31st.