Spend Matters welcomes this guest post from Monika Sosnowska, of Mintec.
U.S. lumber prices have started to climb after reaching a 5-year low in September, although they remain around 20% lower compared with last year. The expiry of the Softwood Lumber Agreement (SLA) between the U.S. and Canada in October, and lack of news on whether it will be renewed, has brought uncertainty to the market.
Last year, difficult winter weather conditions affected both the demand and distribution of wood, pushing U.S. prices down. The price increases seen toward the middle of 2015 were fueled by a rise in demand for exported lumber and good performance of the housing and construction market. New housing starts increased by around 30% from February to April this year and have stayed at relatively high levels since then.
However, this rise in demand was not strong enough to sustain prices, which began to drop in June and fell to a 5-year low in September. A mixture of factors contributed to this: weaker demand from China, high production in both the U.S. and Canada and the trade agreement coming to an end.
The Softwood Lumber Agreement (SLA) was established in 2006 to regulate imports from Canada in an attempt to introduce a minimum price range. As the lumber industry in Canada is structured differently to the U.S., with the majority of Canadian forestry owned by the state as opposed to being on privately held land in the U.S., there had been ongoing disputes as to whether this counted as government support, therefore putting U.S. producers at a disadvantage. This led to a wide range of complaints and concerns being raised in the past. The agreement was designed to prevent these complaints by better regulating the market.
The agreement came to an end in October and debate continues as to whether there will be a new agreement. The U.S. currently shows little interest in resigning the deal, unless the conditions can be renegotiated, as the U.S. views the current settings as outdated. The U.S. is Canada’s largest lumber market and the end of the agreement has brought a significant amount of uncertainty and increased the risk of trade disputes between the two countries.
So, what is the next move? If Canadian producers sell their lumber at a low price, the U.S. government might put restrictions on trade with Canada. This could lead to price increases on the U.S. domestic market due to less competition, which might be beneficial for U.S. lumber producers in the short term — but could also harm the recovery in the housing market if lumber becomes significantly more expensive. New housing starts increased 10% month-over-month in November, up 16% year-over-year, and are expected to soon reach the high levels seen in 2007, prior to the financial crisis. The U.S. housing market is expected to continue to grow in 2016, with the housing starts expected to almost reach the levels seen back in 2007, before the market crashed.
Hopefully a newer agreement will be introduced soon to remove any potential conflicts. Fortunately, there was a window built into the old agreement that prevented litigation in the 12 months after the agreement finished, so they have until next October to try and get a new agreement in place.