Lumber Trade Wars on the Horizon

Spend Matters welcomes this guest post from Deni Koenhemsi, senior economist at IHS Markit.

This trade case, regardless of its conclusion, will cause heightened volatility and increased prices. We recommend placing orders before the year ends, as prices will escalate further at the beginning of January 2017.

On November 25, 2016, the U.S. Lumber Coalition submitted a petition to the U.S. Department of Commerce and the U.S. International Trade Commission, asking for relief from what it described as "Canadian subsidies and dumping."

This move was highly anticipated. The softwood lumber agreement that governed the softwood lumber trade between the two countries came to an end after nine years in October 2015. There was a standstill period for another year, during which parties could not file any trade cases against each other. Although Canada and the United States continued to negotiate for most of the past year, they could not come to an agreement by October 13, 2016, when the standstill period ended. Thereafter, the two sides were permitted to petition for a trade case. The lumber trade between the countries, which was tightly managed previously, had a full year of no tariffs or quotas.

The resolution of trade cases is hard to predict, but the uncertainty is especially high during the transition to Donald Trump's presidency. During his campaign, the president-elect voiced protectionist trade policies, including policies against North American Free Trade Agreement (NAFTA) members. However, details on those policies have yet to be given.

What is the timeline for this process?

The U.S. International Trade Commission (ITC) is scheduled to make its preliminary judgement on January 9, 2017. If the USITC rules in favor of the petitioners, indicating there is material injury to domestic producers, the Department of Commerce will continue to investigate and is likely to make its preliminary countervailing duty determination towards the end of February and antidumping determination towards the beginning of May. Therefore, the timeline points toward increasing price pressure for the spring months, as a result of possible CVD and AD measures coupled with rising construction activity. The trade case does not end there. Canada is then expected to petition for appeals through NAFTA or the World Trade Organization.

Why was last year so important?

This is a textbook trade case with a long history. However, discussions got heated last year as Canadian softwood exports to the United States increased significantly after the agreement elapsed. According to the U.S. Department of Commerce, in the first nine months of 2016, the quantity of spruce-pine-fir (SPF) imported from Canada increased by about 30% (although it remains below pre-recession levels). A significant part of imported lumber is used for framing in the United States. Thus, cheaper prices and higher imports from Canada put a lid on U.S. softwood lumber prices as demand from rising housing construction increased.

So perhaps you purchase softwood lumber, or it is an input cost for your product. How will this trade case affect you? The markets have responded to the initiation of this petition. Prices for British Columbian Spruce-Pine-Fir increased 5% after the filing of the petition. This increase came on top of already high prices. Although, there was some give back in the last two weeks, we expect higher pricing in the run-up to the USITC's preliminary decision. Therefore, it is best to put in orders this week and the first week of January. We expect higher prices in the first and second quarters of 2017 for Canadian lumber. For U.S. lumber, the pattern will be similar. Higher prices and possibly lower quantities of Canadian lumber would support higher prices for species such as Southern Yellow Pine and Douglas-Fir.

However, it is important to remember that there is still some time before this trade case reaches any preliminary conclusions. Now is not the time to accept large price increases. Raw material price increases or price drops do not transfer 1-to-1 to intermediate goods. If you have not seen any price drops from your softwood lumber inputs in 2015 and in the first few months of 2016, you still have time to negotiate against price increases.

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