When Canadian National Railway announced in August it was expanding a lumber transload facility at Prince George, British Columbia, it marked one of the few events in the past four years with a hint of growth in the North American forest products market.
But the agreement for the site also suggested just what had happened to the lumber business under the meltdown in U.S. housing.
CN will expand the facility in partnership with CNBM Forest Products Trading, a Chinese company, to handle some 30,000 China-bound containers annually to help meet the demand in that country’s booming housing market. A company spokesman says the facility has expanded gradually since its opening in 2007, when the Prince George facility could handle 16,000 containers.
Closer to home, North American railroads have found few opportunities to build lumber shipments back to anything near the levels they saw before the housing market collapsed in 2008.
Between 2007 and 2009, BNSF Railway’s lumber and panel volumes dropped more than 50 percent as housing starts plummeted. The railroad includes lumber under its building products business, where average quarterly revenue declined from more than $300 million in 2006 to less than $180 million in 2009.
The company has reduced publicly available data since being acquired by Berkshire Hathaway and a spokeswoman declined to update those figures. “We are still moving lumber, just not at the levels we were at the industry peak in 2005,” Suann Lundsberg wrote in an e-mail. “When the lumber market returns to 2005 levels, we will have the capacity and network to handle that demand.”
That decline is simply because the U.S. housing market collapsed like a felled tree. U.S. Census data show construction of some 1.05 million new homes began in 2007. By 2009, new construction starts had fallen to 445,000. There was only a slight recovery in 2010, but new starts were off 12 percent in the first three quarters of 2011 from the year before.
“The current state (of lumber markets) is exceptionally weak in North America,” said Pat Quinn, a forest products analyst for Royal Bank of Canada. “The sentiment (for 2012) is very much a repeat of 2011.”
That’s where China’s economy has been a boon for the forest products companies, feeding exports. Trans-Pacific lumber sales are rising sharply as Pacific Northwest loggers exploit growing Chinese demand for North American lumber. China is closing the gap, but remains a distant second to U.S. markets still bruised by an oversaturated housing supply and anemic economic growth.
Weak U.S. demand has allowed China to gain significant market share in British Columbia, which accounts for nearly three-fourths of Canadian lumber output. Government statistics show Chinese-bound lumber shipments climbed to 22 percent of the province’s exports through September, compared with 1 percent in 2006. The U.S. share has fallen from 73 percent to 42 percent during the same period.
“The U.S. housing market continues to struggle with a high number of foreclosures and weak housing prices, and is expected to recover at a moderate pace over the long term,” CN, the largest North American hauler of forest products by volume, noted in its 2011 investor book. “Canadian producers continue to look for other markets, and Asia will continue to play an increasing role in lumber consumption.”
West Frasier Timber, one of the region’s largest companies, reported external sales of $360 million to China through the first nine months of 2011, compared with $222 million for the same period a year earlier. Chinese sales now make up 17 percent of the company’s sales compared with 10 percent in 2010.
Railroads have felt the market changes. Canadian National is working to increase export capacity in Vancouver and Prince Rupert, while railroads more captive to domestic buyers have seen lumber shipments crippled by housing starts that remain at a third of the mid-2000s market peak.
“As we look back and look forward, it is all about supply and demand,” said Scott McGregor, Norfolk Southern’s group vice president for paper, clay and forest products. “There is more supply in the industry — the railroad industry and the lumber industry — than there is demand.”
Plum Creek Timber, a major U.S. producer, is one of several companies that reduced harvests in recent years because of low prices, and sold about 70 percent less from its northern region in 2011 than in 2004. The company’s sale prices have increased along with rising sales to China, a trend CEO Rick Holley said could lead to higher harvests, particularly if U.S. housing starts exceed projections.
“I think you’re going to start to see sawlog prices move, and we’ll bring back some of the harvest that we deferred,” Holley told analysts during an earnings conference call in October.
McGregor is less optimistic, noting the size of houses now being built is smaller and the proportion of multi-unit developments is growing. Both factors translate to less wood used for framing.
NS has seen a shift in the balance of its western U.S. and Canadian lumber shipments, historically, the company’s largest market segment, and production from eastern Canada and the Southeast. The volume gap between the two regions has narrowed as western shipments have declined. At the same time, forest products companies are seeking new opportunities by selling wood for natural gas drilling pads and increasing pellet sales for European energy buyers, McGregor said.
“I don’t know that 2012 looks much different than 2011,” he said.
Barring dramatic economic change, growth will remain slow, Quinn said. “The industry has gone through some contraction (in recent years), and even the sawmill capacity that is there is not full out,” he said. “We’re still seeing very low levels of employment, so even if mortgage rates are low, you’ve got to have a job to pay the mortgage.”
Contact Peter Gartrell at email@example.com.