Many Japan-based softwood lumber importers have abandoned a longstanding traditional practice of purchasing Western spruce-pine-fir (S-P-F) J-grade on a quarterly basis.
The trend began late last year and has grown increasingly prevalent throughout 2023. Historically, Japanese importers, especially the largest home builders, cover the majority of needs for J-grade through quarterly contracts. Negotiations are based largely on buyer projections for usage over the coming three months along with producers’ anticipated availability during that time frame.
However, since late last year, traders have found near-term end use more difficult than usual to gauge. Further, price trends in the open market have also become unpredictable. As a result, buyers no longer feel comfortable committing to purchases three months out. Instead, they have opted to replenish on a monthly basis. The strategy is designed to reduce exposure to downside price risk and avoid getting caught with excess inventory if near-term consumption fails to match builders’ projections.
The chart shows that Western S-P-F J-grade #2&Btr 2x4 prices have declined steadily in the Japanese market for the past year. The April average is the lowest since August 2021.
Fading prices for #2&Btr 2x4 in the domestic market have contributed to the downward pressure in Japan. Canadian mills base production decisions on how domestic returns compare with profits available through sales to Japan.
The reported Western S-P-F #2&Btr 2x4 f.o.b. mill price has posted declines in 10 of the last 12 months. The downward trend has prompted mills to shift production toward J-grade. Weak overall Japanese demand has failed to absorb mill supplies, and buildups have developed in recent months.
Weak demand in Europe leads to a focus on exports
Further, an influx of competitively priced European J-grade has contributed heavily to the downward pressure in Western S-P-F. Beginning last year, unusually weak demand in Europe prompted producers to ramp up exports to compensate for fading domestic sales within the continent.
European shipments to the US set a record in 2022. Exports to Japan and China also surged. Those trends persisted through the first quarter of 2023. Exporters in Central Europe offered J-grade at discounts well into triple digits compared to Canadian mill quotes as they aggressively sought to build market share in Japan.
The gap between European and Canadian J-grade mill asking levels narrowed through the first quarter. Nonetheless, Western S-P-F exporters continued to battle for orders against discounted white woods from Europe. Scandinavian suppliers were especially aggressive with price cuts in early April.
A shifting and unstable housing market in Japan has sapped overall demand for J-grade lumber used in 2x4-frame construction. Inflationary pressure in the overall economy along with rising costs for labor, energy and other items have priced many prospective new home buyers out of the market in Japan.
Builders seek price cuts on lumber amid rising pressure to make housing more affordable. Further, housing demand has shifted sharply toward spec homes while sales of custom homes have lagged throughout 2023.
Canada battle Europe for market share
However, the shift toward monthly purchasing has given Canadian producers a foothold in the battle with Europe for market share. Significantly shorter shipping times allow Canadian producers to provide much more prompt coverage compared to European suppliers. Western S-P-F exporters also can often offer more precise tallies or a full complement of traditional assortments that buyers often seek.
Traders note that Western S-P-F often captures modestly higher prices in Japan compared to European white woods because of the available tallies and shorter lead times. Lumber used in traditional post & beam housing construction has remained abundant at Japanese ports since last year. That stock is available at competitive prices as distributors work to clear ongoing buildups, which hit record volumes last summer.
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