Audio Lumber prices The complex lumber market How inventory affects prices The impact of increased supply

Erik Gabrielson: I'm here with Jon Anderson, publisher of Random Lengths publications, which serves the wood products industry. Jon, can you tell me a little about yourself and your background in the industry?

Jon Anderson: My own background is starting with Random Lengths in 1974. Random Lengths is a privately held family business. I started working for my father back then. We are an independent news and information service for the wood products industries with specific focus on the markets for finished products and the prices of those products. I am now the publisher, president and owner of Random Lengths.

EG: Where are softwood lumber prices now?

JA: After a fairly active first quarter, I would say that prices have been chronically soft since April. It's been actually just toward the end of the first quarter that prices started sliding. There have certainly been a few ups and downs along the way, but the market has faced some chronic oversupply. ( Listen. )

JA: We don't get into that. Prices are prices. I can give you some perspective, however. I'm looking at lumber prices in the Framing Lumber Composite that we compile here at Random Lengths. In the year 2000, the average was $323. In the year 2001, $312. We are currently around the $310 mark.

EG: Can you briefly describe what your Framing Lumber Composite index entails?

JA: The Framing Lumber Composite is a broad measure of price movement, and we include 15 framing lumber prices. Those are representative of the major producing regions and of the key commodity framing lumber items, and I would emphasize framing lumber, not 1-inch boards or any other items.

EG: Canada was able to make some duty-free shipments to the United States during a period of time between April and May. Do you know how much wood they shipped and what effect this has had on lumber prices?

JA: We don't have the data from the U.S. Department of Commerce or Statistics Canada. There's a time lag involved. In terms of the actual shipments into the U.S., there surely is strong evidence that shipments did increase. Canadian production was up in the first four months of the year, and you had movement of inventories from one side of the border to the other side of the border because of the imposition of the duties and how that played out through the second quarter of the year.

EG: It is obvious that lumber prices are soft, and it seems that there has to be a correlation between soft lumber prices and the increase in duty-free lumber shipments from Canada. How long do you think it will take before that 27% duty might take hold and we might see an increase in lumber prices?

JA: You've answered your own question almost there because I could disagree with some of what you said. The inventories that were moved across the border, based on the reports we have currently, have been pretty well worked down. But the market - not us at Random Lengths - but many in the market have looked for substantial curtailments in Canada. Those have not occurred. There has been one large manufacturer in eastern Canada who announced some curtailments that were in addition to traditional summer curtailments. But I think there has been some surprise held by people in the trade on both sides of the border at how few shutdowns and curtailments there have been.

I emphasize to you that the market is a very complex one, and to isolate one factor is very difficult, even in the case where you have a rather earthshaking event like this large duty applied on Canadian lumber imports. Production is up in the U.S. regions mostly, although the inland U.S. is not reflecting increased production, but the South and the West Coast regions show some fairly significant increases in output this year. So how this thing will play out is difficult to say. Certainly, the demand side of the market is a very key element to determining prices as well, and demand over the long term has been very healthy, as witnessed by housing start figures. Who knows - how the stock market is behaving may have an impact on people's attitudes toward purchasing new homes down the road, too, so that certainly has to factor in as well.

There is that perception out there that prices were going to - or will - increase dramatically because of the 27% duty that was put on Canadian shipments. Something like that takes quite awhile for the market to digest and for the industry to digest, and rather than some huge leap in prices in a very short period of time, I think that the market absorbs and adjusts to this sort of thing rather slowly. ( Listen. )

EG: Any idea on how long it would be before we see an increase in prices?

JA: None. This has never happened before. We've had some trade action between the U.S. and Canada previously, but nothing this large. [During] previous trade actions, I would say market volatility did occur more in the short term. There's been some volatility associated with the countervailing duty and the anti-dumping duty cases that occurred here recently, but again, the market didn't quite behave the way a lot of people might have expected it to.

EG: What has been the reason for some of the sharp increases that we've seen in lumber prices, particularly in the 1990s, and does the current 27% duty mirror any of these past cases?

JA: When you look at the whole '90s, you go back to the spotted owl days and the basic removal of the national forests and Bureau of Land Management lands out of the timber supply business, and there was dramatic volatility associated with that. In a period of time when the economy was recovering from the early-'90s recession, any volatility after that has been more associated with perhaps trade action against Canada or the Softwood Lumber Agreement that occurred - the imposition of it and then the termination of it. That stretched from the mid-1990s to the termination in 2000.

Certainly there are momentary up and down periods that might be associated with one event or another, but right now as I try to recall, those were the big events that occurred in the '90s and caused some ups and downs in the market. The increase in prices in the early part of this year was mostly associated with inventory replenishment in the marketplace after the inventories were drained, probably almost more than they ever have been following September 11 and the fourth quarter of 2001. So you had, along with a recovering economy and a very healthy housing market, a distribution system that needed to replenish substantially.

So prices did climb fairly dramatically in the first quarter, and since, they have been mostly on the soft side. Why have they been on the soft side? High production levels - not only in Canada - but in also in most of the U.S. With those high production levels came the move by the Canadian industry to get lumber inventories across the border prior to the imposition of the duty. Who can blame them for that? It would seem a fairly logical, short-term strategy, and I think that's what we're talking about with the inventory movement across the border at that time. ( Listen. )

EG: Given the potential for the 27% duty to take hold in the market and maybe increase prices, would it be wise for a builder to try to lock in lumber prices at today's price?

JA: I'm not going to answer that. We don't get into the prediction game at all. We aren't going to tell somebody how to conduct their business. Clearly, someone who is buying lumber needs to look at what their own needs are as well as market conditions. Their own needs are going to loom, I would think, at least equally as large in determining when and how they might buy lumber. When you talk about builders, there are the small, custom home builders in Eugene, Oregon, and then there are the huge, publicly traded companies that build thousands of homes. So it's impossible for me to make some blanket statement.

EG: But it is fair to say, like you said before, that it's a complex market and you can't assume that the duty is going to increase prices or that the flood of lumber that Canada shipped to the U.S. is going to have any immediate effect.

JA: I think that the movement of inventories across the border combined with the production levels that we've seen this year have definitely had an impact. There are two parts to that. The duty is certainly going to hurt the Canadian industry. It's going to take awhile for the effects to become apparent. I would say bluntly that prices aren't going to go up 27%. But you've taken a third of the market and increased the costs of production, obviously considerably for that slice of the pie. How much product will come in to substitute whatever long term [product] is reduced from Canada is difficult to say. There's probably some capability on the part of some producers in the U.S. to increase their output, and there is a growing import of lumber products from offshore supply regions. I'm starting to touch on the complexities, I guess, of how the market works and where the supplies come and ultimately how prices are determined. ( Listen. )

EG: Tell me about what your company does and what services you offer, and maybe how you could assist a builder who's looking to research lumber prices.

JA: Our main publication is a weekly report. It's distributed electronically, by fax and by traditional mail. That weekly report covers all of the North American wood products markets, whether it's lumber coming from Canada, the western U.S. or the southern pine region in the U.S. We give some coverage to the offshore imports of lumber, too. The report has a price guide with representative prices for about 1,500 different lumber and panel product items. The prices go up and down, and we believe that if someone is purchasing lumber or selling lumber, they can track current trends by reading Random Lengths.

We have some other services. We publish a directory of the industry in North America, covering the producing and secondary levels - that is, wholesale distribution levels of the market. We have some other newsletters covering the international trade in wood products, and we have a monthly compilation of statistical information that relates to the wood products markets. Our main publication, and what we are most known for, is the Random Lengths Weekly Report. It's the most widely distributed report of its kind by far, and I think recognized as the most prominent.

(Download a recent edition of the Random Lengths Weekly Report in PDF format.)