Volatility in both consumption and pricing defined North American wood product markets in 2020.
As pandemic-related lockdowns brought the economy to a halt in March 2020, mills cut production from 10% to as high as 50%, in some cases.
Lockdowns hit pulp markets hard, reshaped by new trends in paper products. Most notably, the pandemic accelerated the decline of graphic paper consumption. The economic contraction led to a rapid shift toward electronic media, fewer paper advertisements and a decrease in mail volume.
However, more time spent at home caused demand to surge for tissue and hygienic products. Similarly, increased e-commerce has elevated paperboard and packaging consumption.
On the softwood lumber side, government stimulus and a precipitous decline in interest rates left many Americans with cash on hand. Stuck at home, homeowners’ expenditures on residential improvements surged. That, coupled with the inclusion of construction as “essential work,” led to a massive increase in demand for wood products.
With production already cut and mills hesitant to rapidly restart, dealer inventory plunged to record lows, and prices skyrocketed. Production was slow to resume, and pandemic-related labor restraints prolonged the shortage, thereby keeping prices elevated.
Still, the residential construction sector has outperformed the rest of the U.S. economy by a wide margin since the pandemic erupted in the spring, and it is expected to continue to do so for the next few years.
Pulp in decline
Consumption levels for graphic paper are unlikely to return, much like the 2007-09 recession when consumption dropped 18.4%.
Demand for household tissues and hygienic products are expected to decline from their peak during lockdowns, but they are likely to remain elevated in the near term. Paperboard and packaging will remain robust, trending higher in the near term.
Our current forecast shows paper consumption dropping to 24 million tons (18%) and slipping to 23.7 million tons in 2025 despite a recovering economy. In the long term, consumption is expected to continue to fall, albeit at a slower rate.
Conversely, paperboard and packaging production will trend higher over the long term. Despite falling 3.8% in 2020, demand will push upward to 47.4 million tons by 2025. Production is expected to track consumption patterns, increasing to nearly 53.4 million tons by 2025, or 8.7% above 2020’s level.
Here in the Northeast, pulp production challenges, including labor challenges due to COVID-19, have been exacerbated by the loss of Pixelle’s mill in Jay, Maine. The mill’s digester exploded last April, and the company has decided to not rebuild the pulp mill and will permanently idle one of its paper machines. The other two paper machines will continue to operate using pulp sourced from other pulp mills. The mill represented roughly 20% of Maine’s operational pulp capacity.
Nationally, pulp production continues to fall. Production declined 8.5% in 2020 but is expected to recover over the next two years before it plateaus near 50 million tons.
Weaker consumption of paper and expanding capacity in the Southern Hemisphere will limit production.
Lumber prices will remain high this year.
Demand is strong, inventories are at record lows, and production will continue to be hampered by fiber supply shortages. As a result, we expect prices to increase.
Prices will likely decline a bit in 2022 not because of weak demand, but due to the expectation that mills will increase production to meet rising demand and take advantage of high profitability. With production moving in line with demand in 2022, prices will fall back toward more “normal” profit levels.
Residential construction accounts for 70% to 75% of U.S. softwood lumber consumption. The two main components of residential construction are new construction and residential improvement expenditures.
New home construction is expected to be strong this year. There are a number of reasons for this:
- historically low interest rates
- decent income growth
- strong demographic tailwinds due to a population bulge entering their prime home-buying years
- high pent-up demand after a decade of underbuilding
- low inventory of homes for sale
In addition, residential improvement expenditures will remain strong. The average age of the housing stock in the U.S. is 42 years and the average home size of the U.S. housing stock is 1,700 square feet, while the average new home is nearly 2,500 square feet.
There is significant incentive to improve or add on to a home, and bring it up to more modern standards. This is especially true given the high level of equity homeowners currently have.
With end-use market activity remaining strong, we expect domestic consumption to grow 4% this year. Meanwhile, production will have difficulty keeping up with demand as fiber-supply constraints in British Columbia and on the West Coast, combined with a lack of residual markets in eastern Canada, will likely limit production growth in regions other than the South.
Recent investment in new Southern capacity will bolster North American production, but it will not be enough to meet demand.
Finally, dealer stocks are at historically low levels. Over the past 20 years, stocks have ranged from a low of 1.12 months of supply to a high of 2.57 months. Currently, stocks are a little over half a month’s (0.63) supply. We expect dealer stocks to remain low this year, as mill production struggles to meet the anticipated rise in demand.
Increased production in 2022 as new Southern mills become operational should allow dealers to rebuild their stocks to more “normal” levels.
Jannke is a principal of Forest Economic Advisors LLC.