Could headwinds hinder softwood lumber markets’ return to normalcy? | 2024 preview

Can we expect a rebound in the global softwood lumber market, or are turbulent times ahead in 2024?

Softwood lumber traders worldwide begin 2024 with a glimmer of hope that a post-pandemic new normal might finally emerge after several years of upheaval. Plateauing interest rates and encouraging signs in the U.S. housing market in late 2023 provided a reason for guarded optimism in North America. U.S. and Canadian exports to China increased last year for the first time in several years, and prices in most markets worldwide aligned more closely with historical levels compared to the previous three years.

However, 2024 harbors no shortage of potential headwinds that could engulf markets in chaos.

The Ukraine war and resulting trade sanctions against Russia are likely to be ongoing distractions. Further, the year begins with the potential for fighting in the Gaza Strip to escalate, which could embroil the Middle East into turmoil. European economies will need to rebound from a dismal 2023 for markets to strengthen in that region. A presidential election year in the U.S. promises to be a major distraction, especially later in 2024.

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North American softwood lumber market

Prospects for relief from the soaring interest rates that stifled the U.S. housing market and overall economy for much of 2023 infused optimism into many traders’ projections for 2024.

The Random Lengths Framing Lumber Composite Price averaged $411 in 2023, down sharply from $779 in 2022 and a four-year low. However, last year’s average was strong by historical standards beyond the pandemic-induced anomalies evident between 2020 and 2022.

Most forecasts anticipate another year in which prices hover in a range consistent with pre-pandemic historical patterns. Fastmarkets’ latest projections indicate U.S. housing starts will reach 1.416 million units in 2024, up from a projected 1.409 million units last year. Fastmarkets’ forecast predicts single-family housing starts will gain, fueled by a solid labor market and lower mortgage rates. The multifamily sector, however, will continue to contract.

Projections from the United Nations Economic Commission for Europe’s Committee on Forests and the Forest Industry (UNECE) indicate North American softwood lumber production will fade to 95.73 million cubic meters in 2024, down 2% from 2023. A 6% decline in Canadian production, to 31.33 million cubic meters, will offset a mild increase in U.S. output to 64.4 million cubic meters.

North American softwood lumber exports to overseas destinations were on pace through October to decline for the ninth consecutive year. Canadian exports fell to 1.19 billion board feet through October, down 6% from the 2022 pace. U.S. shipments offshore slipped 4% to 322 million board feet. UNECE projections show a continued gradual decline in both Canadian and U.S. exports in 2024.

European exports to the U.S. faded slightly in late 2023 after challenging records earlier in the year. Shipments through October reached 1.64 bbf, up 3% from the 2022 pace. U.S. demand for European lumber is likely to remain strong this year as importers adjust to declining availability from Canada. Imports from Canada fell 9% through October. That trend is expected to continue in 2024 amid fading Canadian production.

Japanese softwood lumber market

Prospects for North American suppliers appear mixed and tenuous in the Japanese market this year. Overall, Japanese demand is expected to fluctuate mildly compared to 2023, with total housing starts forecasted to mirror last year’s volume closely.

Housing companies are expected to continue building more affordable homes, which could bolster sales as consumers become less fearful of inflation. But in their efforts to reduce costs, builders are constructing smaller homes, which require reduced volumes of lumber per unit.

Further, 2024 begins with inventories at key ports largely in line with historical volumes. Last year, record inventories at the Tokyo lumber terminal, especially of beam stock from Europe, stifled demand through most of the first half.

Canadian exporters have lost market share in Japan to European and Russian suppliers in recent years. Their ability to maintain or regain market share will be a key factor in the Japanese market this year.

Europe’s ailing economy will sustain pressure on mills in that region to ramp up exports, with Japan a primary target. However, log costs are forecast to increase substantially in Europe, and exporters will likely need to raise prices on shipments to Japan to compensate for the higher roundwood costs.

As a result, Canadian suppliers begin the year with guarded optimism that quicker shipping times and competitive prices can help them build market share in Japan this year. Many traders noted, however, that sales to Japan are likely to remain a grind all year. An ongoing gradual shift toward the use of Japanese Sugi will add to the challenge for exporters.

Total Japanese imports plunged 37% through the third quarter of 2023, falling to 2.62 million cubic meters. Imports from Europe fell 41% while Russian shipments plummeted 46%. Russia and Europe combined captured 61% of the total Japanese import market through September, down from 67% through the third quarter of 2022. Canadian and U.S. exports to Japan, meanwhile, fell 32% and 12%, respectively. A fire destroyed Chugoku Lumber Company’s Kashima mill in August. The resulting absence of Japan’s largest beam stock-producing mill could increase demand for imports in 2024.

Chinese softwood lumber market

The Chinese market proved to be an oasis in an otherwise desolate landscape for North American exporters in the Pacific Rim last year. Canadian exports to China, primarily low-grade Western S-P-F, jumped 19% through October, reaching 524 mmbf.

Shipments from the U.S., more than half of which was Southern Pine, surged 70% through October, on pace to post the first annual gain since 2017. Trends in 2024 will depend heavily on North American exporters’ ability to compete with Russia, Europe and other suppliers worldwide for market share.

Total Chinese softwood lumber imports increased 8% through the third quarter compared to the 2022 pace, reaching 13.6 million cubic meters. The gains were somewhat surprising to many observers because the country’s real estate sector was in disarray with many companies suffering severe financial struggles for most of the year.

Government programs designed to bolster real estate investment in China could help boost that sector, which could give the country’s demand for softwood lumber a shot in the arm. The impact of those programs, however, is anticipated to be most evident later in the year by most accounts. As a result, most traders expect a slow, methodical start to trading in China in early 2024 with demand regaining its stride as the year progresses.

This story was first issued by Random Lengths International.

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