Western producers, dealers face historic challenges

fN 2005. the lumber marker made lhistory by recording the highest demand ever with a record 64.3 billion bd. ft. used in the country. Three years later, western mills find themselves in another historic timethe larsest downturn in demand ever recorded. And according to WWPA, the downward trend is forecast to continue through 2009 before beginning recovery in 2010.

U.S. lumber demand is expected to finish 2008 at 40.9 billion bd. fr., the third consecutive decline in demand and36Vo below the 2005 peak. The23 billion-bd.-ft. decline in lumber use is equivalent to the volume produced by all western mills at its all-time highs in the late 1980s.

The unprecedented decline in the home construction market has been the chief culprit in the loss of lumber demand. Traditionally, home building consumes as much as 45Vo of the lumber used each year. In 2005 alone, some 27 .6 billion bd. ft. of lumber was used in new home construction.

Housing starts began falling in 2006 as questions arose about subprime mortgage loans and other questionable lending practices. By 2O07 , the housing market was in full retreat, with the number of housing starts falling by nearly one-half million from the previous year-a25Vo decrease.

As the sub-prime mess spread to financial markets, housing went into freefall. For 2008,just 930000 houses are expected to be built, down 3l%o from the previous year.

The spreading weakness in the U.S. economy forced WWPA to downgrade its earlier housing starts forecast for 2009. The association now expects just 803,000 homes to be builr this year, a post-World War II low. As a result, lumber demand should fall to 35 billion ft., the lowest annual consumption since 1982. Lumber used in residential construction will total 9.5 billion ft., one-third of its 2005 peak.

Weak markets have taken their toll on production levels at mills in the U.S. and Canada. After peaking at 19.3 billion bd. ft. in 2005, wesrern mills have reduced production at an accelerating rate.

Production in the West should total 13.4 billion bd. ft. in 2OO8,17Vobelow the previous year. This year, lumber output in the West is expected to reach just I 1.8 billion ft. Southern mills will follow the same trend, with production dropping l'|Vo for 2008 and slipping another l3%o to l2 billion ft. in 2009.

Canada and other foreign lumber suppliers have fared worse than U.S. mills. Canadian lumber imports have declined by some l0 billion bd. fr. over the past three years and should finish 2008 at ll.9 billion ft. Canada will lose even more market share in 2009, as shipments slip to just over 10 billion bd. ft.

The inroads European mills made into U.S. markets have all but disappeared. Weak markets and unfriendly exchange rates have reduced European lumber shipments by more than 70Vo. In 2009, European mills will ship 550 million bd. ft. to the U.S., compared to 1.97 billion ft. exported to American destinations in 2005.

The lumber market should start the slow road to recovery in 2010. Housing starts will move higher, to around 940,000 units for 2010, then rally in 201 I to more normal levels of about 1.5 million. Other markets for lumber, such as repair/remodeling and commercial construction also will rise.

The recovering lumber market in 2010 will push production higher and by 2011, U.S. volumes will rise strongly, but remain below 2007 totals. Demand for lumber may not return to the lofty heights achieved in the middle of this decade. However, lumber producers and dealers who can weather the current storm could find much more stable and profitable markets in the future.