By: Montreal Gazette
A steady rebound in U.S. housing activity over the next two years will spell much better times for North American lumber producers and lessen their reliance on the big Chinese market, says Montreal-based institutional investment manager Addenda Capital Inc.
The lumber industry, with annual sales of $20 billion U.S., has become “surprisingly healthy” after facing a critical downturn after the 2008-2009 global financial crisis, says analyst Todd Kapala in a study released Friday. Addenda manages a total of $25 billion.
“Forest products are often associated with doom and gloom,” says Kapala, “That certainly is the case for newsprint and paper as they face the electronic media’s onset, but not for lumber.”
Canadian lumber producers, east and west, found themselves in the eye of the storm after the U.S. housing bubble burst in the recession, the study says. U.S. housing starts by 2009 were down 73 per cent from the peak annual rate of 2.1 million units to 550,000 units. The U.S. is traditionally the Canadian industry’s principal market.
Producers in Canada and the U.S. slashed spending, mothballed mills and laid off thousands. About 15 per cent of capacity was permanently shuttered.
Canadian producers were forced to look for new markets and China effectively came to the rescue. China needed rising imports of lower-quality lumber for its construction boom, especially for concrete forming, just as British Columbia struggled with the mountain pine beetle.
“There was little demand for the infected wood in North America but it met the needs of China perfectly,” says Kapala. The demand from China represented the equivalent of 300,000 to 350,000 U.S. housing starts.
“Chinese demand will eventually be displaced when U.S. housing starts reach 1.2 million to 1.3 million units annually since pricing is higher in the U.S. and shipping costs are lower. At that point North American demand should be sufficient to eliminate any supply surpluses.”
The 25-to-34-year-old segment of the U.S. population, hardest hit by the recession, is getting back on its feet as shown by the employment numbers, the study says. Full-time employment is now just 500,000 jobs shy of the pre-recession peak. Mortgages are less costly and this group is the driver of the key single-family housing market.
Also, housing has become more affordable and the National Association of Realtors estimates monthly principal and interest for a median single-family home was 23 per cent of disposable income at year-end 2014, down from an annual average of 35 per cent since 1990. The inventory of existing homes is also low, driving prices up in many regions.
Kapala notes demographic and social risks ahead, but “we see robust lumber pricing for years to come even if housing starts struggle to reach the long-term annual average of 1.4 million units … though rising North American prices could attract heavier import competition from Europe.”
By: Montreal Gazette