April 10, 2017
Spring is in the air! At Freres Lumber Company, we’re hopeful that its arrival on March 20th will also signal more robust panel and wood products markets for the remainder of 2017. In my mind, there are more positive than negative elements in the marketplace today.
From a national perspective, housing starts are currently trending at 1.28 million starts. Considering the projected rate is 1.3 million and the market seems to be building momentum, there is a possibility that we could exceed analysts’ projections for the first time in recent memory. More importantly for plywood panel products, the industrial sectors of the economy are surpassing expectations. Plywood has largely ceded the residential markets to OSB over the last couple of decades but the industrial markets realize the quality benefits of plywood panels.
According to RISI, 2015 and 2016 resulted in back-to-back contraction in plywood panel demand. The demand capacity ratio, a measure of North American producers’ capacity to meet market demand, peaked at 80% in 2016. This means that producers could produce an additional 20% total volume if the demand materialized. RISI’s current projection is that we will peak at just over 90% this year. Due to the increase in housing starts and increasing industrial production, 2017 panel demand is expected to increase over 6%. While projections indicate that demand will increase, they do not forecast any additional strength in panel prices, largely due to imports.
Imports are still the largest unknown and potential negative for pricing and potential production capacity. The rate of increase for panel imports has slowed greatly in the last quarter, but the previous triple digit volume increases arriving in North America were unsustainable. Brazilian imports into the USA and Canada grew only 66% in January. We consider that a relief!
For Freres Lumber, panel prices have traded in a fairly tight range over the last month, but margins are tightening due to veneer price increases. We have maintained a respectable order file and consistently have orders in front of us. Rumors on the street are that the distribution yards are still running hand to mouth with the expectation that there will always be supply available to fill the potential demand, as has been the norm since the recession. This may be the year that surprises everyone.
Veneer is thankfully approaching a more realistic price range. Persistently high log prices and low veneer prices were disastrous for veneer producers the last few months and very few plants could say they were operating profitably. The primary driver for veneer price appreciation is the LVL market. Producers were supposedly able to establish the first substantial price increase in years, making them much more optimistic going forward. LVL market veneer sales have been solid and, so far, don’t seem to be retreating in the near-term. However, I do expect there is still some price appreciation ahead of us this year.