Kevin Mason

The incoming U.S. administration has highlighted that it will impose tariffs on friends and foes alike. The application and size of any potential tariffs are unknown, leaving countries and companies guessing about how to position themselves. First-order impacts will be greatest on partners with few alternatives (i.e., Canadian lumber production). Second-order effects are always harder to forecast, but, if Asian paper imports turn away from the U.S., they are likely to flood Europe and/or traditional U.S. export markets. Retaliatory tariffs are to be expected, with the greatest risks to products dependent on export markets, including fluff, dissolving pulp and pellets.

Leaving aside the inevitable unknown unknowns, there are several known economic drivers in the year ahead. Interest rates are expected to decline in 2025, although expectations for the pace of declines keeps changing. Lower rates should increase U.S. housing activity, and even a small increase in activity should have an outsized impact on solid wood and housing markets (as labour allows). The U.S. dollar is expected to strengthen, putting downward pressure on commodities. The U.S. is expected to impose steep tariffs on imports—particularly those coming from China, but also from other countries. This will reshape trade flows over the next few years and should boost domestic manufacturing (although the last go-around showed little benefit). The Chinese real estate conundrum is too deep to be solved in 2025 and will continue to be a drag on confidence, consumption and credit within China and beyond its borders. European economic growth has been weak and is expected to remain so in 2025. The end of Russian aggression in Ukraine would boost confidence and activity in the region.

Housing Starts – Twelve months ago, there was some cautious optimism regarding U.S. housing prospects for 2024. Ultimately, that optimism was misplaced: 2024 has been another highly challenging year for the U.S. housing market. Total adjusted housing starts have averaged just 1.35 million (1.01 million singles; 343,000 multis) through the first 11 months of the year, compared with our year-ago forecast of 1.40 million. Elevated mortgage rates and slower-than-expected Fed rate cuts have been the primary drivers of sluggish housing activity ytd. However, the Fed finally delivered a first (50bp) cut in September, and a further 25bp cut followed right after. With another 25bp rate cut announced this week and two, maybe three, 25bps cuts predicted next year, we believe mortgage rates will finally trend lower through 2025, easing affordability challenges and boosting demand.

For 2025, we anticipate a modest improvement in overall housing starts to be driven by growth in single-family activity, while the multi-family segment is expected to remain subdued. Our 2025 forecast of 1.40MM units consists of single-family starts at 1.075 million and multifamily at 325,000. For 2026, we forecast 1.475 million total starts, with continued measured growth in single-family (to 1.125 million starts) as we move further into the rate-cut cycle; we also forecast green shoots in the multifamily sector (350,000). As for Canada, housing starts won’t climb aggressively despite deeper rate cuts. 2024’s estimated year-end housing starts of 235,000 should rise to 235,000 in 2025 and 245,000 in 2026.

Lumber markets enjoyed mixed fortunes over the past month. S-P-F 2×4 prices peaked at $470 but have declined to $447 in the past two weeks. For SYP 2x4s, there has been no cause for festive cheer: Prices have dropped for six weeks straight and sit at just $333 today. We have already seen a couple of BC-based lumber producers announce extended mill downtime during the holiday period, and, given recent trends in SYP, we suspect many U.S. South-based mills will follow suit. Prices should continue to drift lower through the holidays and into the new year, but we remain cautiously optimistic in our outlook for 2025.

OSB prices appear to have reached a near-term peak; cracks emerged in a couple of markets last week. Benchmark NC 7/16″ prices have held unchanged at $420 over the past two weeks, but Canadian prices declined by $10‒30 last week and downward price pressure appears to be mounting elsewhere. Still, OSB prices will be starting the new year at historically elevated levels. Talk of Trump tariffs will escalate in the coming weeks. Without a tariff on imports of OSB from Canada, we forecast modestly weaker prices in 2025; however, with a 25% tariff, prices could soar to highs never seen outside of the pandemic peaks.

Pulp prices are at or near trough levels in China, with recent small gains in softwood and further small declines in hardwood. European markets are not far behind. The current NBSK floor is supported primarily by higher production costs, along with a long list of capacity closures that are keeping supply tight. We forecast that prices for both grades will rise in 2025, but with a greater premium for softwood over hardwood. Producer inventories remain too high, but are declining for softwood. Stronger demand would help, yet the global growth and demand outlook remains at the soft end of uncertain. The pricing up-cycle will fall far short of prior highs.

Other product outlooks include:

• Newsprint producers benefited from exports this year, but that will fade in 2025. Prices will move lower in time; tariffs are a wild card.
• Paper prices will be mixed, with SC falling to start the year while uncoated woodfree prices rise. Stability is the norm elsewhere, as supply discipline has been a new—and welcome—development.
• Containerboard producers are embarking on another January price hike, somewhat reminiscent of last year. Although it should be partly successful, a capacity reduction would help solidify gains.
• Boxboard destocking is over, and strong y/y figures should persist for a time. Oversupply is evident in SBS, with CRB looking better (and likely to take share). Price moves will be mixed among grades.
• Recovered-paper prices will move up from current levels but aren’t expected to climb aggressively given suppressed demand.
• European paper prices are under pressure, particularly for woodfree grades. More shuts will be needed, as demand will be cycling lower next year.
• European packaging price weakness continues, with more downside risk to testliner than kraftliner. We anticipate prices to trough around midyear. Oversupply is a perennial concern.