The economy and war top lumber market challenges heading into 2023

2023 begins with softwood lumber markets worldwide seeking to emerge from three consecutive years of unprecedented chaos

A severe economic downturn in 2022 replaced the Covid-19 pandemic in 2020 and 2021 as the primary force disrupting trade and creating havoc throughout the industry.

The Ukraine war added to the chaos. Traders spent much of last year adjusting to resulting trade sanctions against Russia and wading through widespread uncertainty regarding how the world’s reaction to the invasion would ultimately impact global trade.

Lumber price recovery based on global economy

Prospects for a return to price and trading trends more consistent with historical pre-pandemic patterns this year appear heavily dependent on how successfully global economies recover from the downward spiral that disrupted most key consuming markets in 2022.

In North America, widespread economic turmoil, including interest rates that soared to the highest levels in more than a decade, overshadowed the fact that 2022 was a banner year in the US softwood lumber industry by historical standards.

The Random Lengths Framing Lumber Composite Price finished the year with the second-highest annual average on record at $779. While prices fell from the record-shattering $855 average of 2021, the composite finished 2022 hundreds of dollars above any other year on record.

Most forecasts indicate prices in the US will retreat toward pre-pandemic levels this year. The composite ranged from $330 to $460 between 2015 and 2019, the five years before the pandemic hit.

Weaker consumption and reduced profits among mills will cause total North American softwood lumber capacity to decline again in 2023, according to Fastmarkets’ projections. Capacity will continue to expand in the South, as it has the last few years. Those gains, however, will be overshadowed by capacity attrition in Canada.

North American annual softwood lumber exports to overseas destinations were on pace through October to post an eighth consecutive decline in 2022. Canadian exports offshore plunged to 1.125 billion board feet through October, down 27% from the 2021 pace. US shipments overseas fell 22% to 337 million board feet.

No sign of export market slowing

The downward spiral could ease in 2023. But a rebound appears unlikely with the same factors weighing on 2022 export markets showing no signs of dissipating this year. US and Canadian exporters continued to lose market share in China and Japan to Europe and Russia.

An ailing European economy stifled demand on the Continent for North American species and forced producers in Europe to ramp up export volumes to compensate for weak domestic sales.

As a result, European exports to the US were on record pace through October, climbing to 1.54 bbf, up 13% from a historically strong pace in 2021. Traders anticipate the US will remain an attractive market for European exporters at least through the first half of 2023. Even if prices in the US continue to migrate toward pre-pandemic levels, the market could still provide strong returns for European suppliers compared to other destinations worldwide.

The banner year traders widely anticipated for European softwood lumber markets derailed quickly in 2022 and never materialized. Russia’s invasion of Ukraine in February and the ensuing fallout wreaked havoc on Europe’s economy and upended the region’s demand for softwood lumber.

Traders begin 2023 in recovery and damage control mode, with the war a lingering uncertainty. Fastmarkets’ economic forecast notes that the Ukraine war has elevated global economic uncertainty to a “level not seen in decades.” The report predicts that the war’s duration and outcome will heavily impact Europe’s economy, especially energy availability and cost.

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