Weak lumber predicted for 2OO8

.nHE difficult lumber markets that |- have vexed western lumber mills. wholesalers and retailers in 2007 aren't expected to improve much in 2008, according to Western Wood Products Association's recent lumber market forecast.

After U.S. lumber demand reached an all-time high of 64.3 billion bd. ft. in 2005, lumber use in the country has declined by more than l0 billion bd. ft.-the steepest two-year drop in the history of the lumber industry.

The faltering housing market has been the chief cause of lumber demand declines. Housing starts through the first three quarters of 2OO1 were on pace to finish below 1.4 million units. That would equate to 600,000 fewer homes built compared to 2005.

WWPA economist Kevin Binam said the credit crunch caused by subprime mortgages has had a significant impact on new home construction. He noted it will take time for markets to work through the financial crisis.

"The collateral damage on the economy from subprime mortgages may be far worse than we know, but the effect it is having on housing is pretty clear, and it's going to last longer than we previously expected," said Binam.

With the supply of vacant new and existing homes rising sharply, the forecast for new housing starts in 2008 is flat at 1.41 million starts. Markets that experienced accelerated home price increases earlier this decade, such as California, Arizona and Florida, will be slower to recover.

Flat housing markets will mean more weakness in lumber demand. U.S. lumber consumption is forecast to shrink further in 2008 to 52.6 billion bd. ft.. the lowest annual volume since 1998.

The housing problems are having a significant impact on western lumber production volumes. Nearly 90Vo of the region's lumber output is structural lumber-products such as dimension lumber, studs and timbers-used to build houses and other buildings.

Western mills shouldered much of the downturn in supply in 2006, reducing production by 7Vo to 17.9 billion bd. ft. Another 1Vo decline is expected in 2001 , followed by a more modest 27a decrease in 2008.

Southern production, which in 2006 surpassed western output for the first time ever, is forecast to decline 1Vo to 17.4 billion bd. ft. in 2001 and slide to 17.1 billion bd. ft. in 2008.

Evcn with thc rcductions in production, weak markets have pushed lumber prices to historic lows. Average prices for Douglas fir lumber-the highest volume species produced in the West-are 3l7o lower compared to peak prices in 2006. Hem-fir lumber prices are off onethird from 2006 highs.

Lumber imports went into freefall in 2007, as weak markets and low prices were compounded by unfavor- able currency exchange rates. By fall, the U.S. dollar reached new lows compared to the euro. The value of the Canadian dollar strengthened to more than par with the U.S. dollar, essentially reducing lumber sales returns by some 307o compared to two years ago.

After totaling nearly 25 billion bd. ft. in 2005, lumber imports to the U.S. declined 8Vo in 2006. The decreases accelerated in 2007. and lumber import volumes are expected to finish down 177o, to below l9 billion bd. ft.

Shipments from Canadian mills are forecast to shp 147o to 17.4 billion bd. ft.. the lowest annual volume to the U.S. in l2 years. Canadian shipments should fall below 17 billion bd. ft. in 2008.

Non-Canadian lumber shipments to the U.S. are forecast to decline 4l,Vo. European lumber imports, which grew to more than 2 billion bd. ft. in 2005, will reach only 701 million bd. ft. in 2007 and decline even more in 2008.

WWPA president Michael O'Halloran said weak markets and poor prices have taken their toll on western mills. But, he added, the low activity of previous two years will set the stage for a strong recovery starting in 2009.

"There is a light at the end of this tunnel. By the end of next year, that light will be brighter and western mills should see improved markets," he said.