We came into 2024 with high hopes: The COVID pandemic and its aftereffects were finally confined to the rearview mirror; energy shocks following Russia’s invasion of Ukraine were behind us; Fed rate cuts were seemingly imminent; and, after a year of “hurry up and wait,” the next U.S. housing up-cycle would commence. How things have changed! Expectations around Fed rate cuts have shifted dramatically in recent months, reflecting myriad negative macroeconomic developments: persistent inflation pressures, worsening consumer sentiment, turmoil in the Middle East, weaker GDP growth forecasts—the list goes on. According to data from the Chicago Mercantile Exchange (CME), just 12 months ago there was a greater than 70% probability that the Fed rate would decline to 3.0–3.5% by mid- June 2024. Today, the CME ascribes a 41% probability that we see one 25bp rate cut (to a target rate of 5.0–5.25%) by the end of the year, and a 23% probability that rates remain unchanged at the current 5.25–5.5% level through yearend.

If we enter a period of stagflation, wood products producers would be one of the more obvious losers in the Forest Products sector. Elevated interest rates stymie housing demand, negatively impacting consumption of lumber, panels and engineered wood products (EWP). Timber REITS will also remain out of favour with investors in a higher-interest-rate environment, while sluggish demand for housing/lumber/panels will hit timber demand. For pulp producers, challenging economic conditions in China (housing-related) are a bigger near-term risk, but stagflation would hurt demand for all pulp end users (although tissue consumption should be steady). Potential impacts on packaging are a little less clear and could be grade-dependent. If stagflation drives consumers to the middle aisle of grocery stores, boxboard should in theory hold up better than containerboard, but we’ve been surprised to see food service spending continue to outperform grocery store spending in recent months. Risks abound in this macroeconomic purgatory.

It’s been a dire month for North American lumber markets, and, as has been the trend year-to-date, Southern Yellow Pine (SYP) continues to underperform S-P-F. SYP 2×4 prices slumped to $285 last week, their lowest level since November 2011. We suspect that even in the low-cost U.S. South, many sawmills are losing money at these prices. Prices for SYP wides are even weaker, trading at or below $250. Further downside from current SYP prices should be limited (i.e., producers can’t keep bleeding red ink at these levels) but, given expected sluggish demand over the coming months (residential construction activity typically slows during the summer), we expect sawmill downtime in the region to eventually spur a measured recovery in prices (back to ~$350 to ~$400).

For S-P-F, 2×4 prices are now in freefall after holding up relatively well through the first three months of the year. Prices have declined by $81 in the past four weeks and are trading at just $382 today. Prior sawmill downtime announcements, coupled with steady demand from new residential construction, supported S-P-F prices through Q1; however, this supply/demand balance has changed in recent weeks. Most BC sawmills were likely (marginally!) profitable when S-P-F prices ticked over $450, and we have seen limited major downtime in the province since Interfor’s 30MMbf temporary downtime announcement in mid-February and Interfor just announced another 175MMbf of downtime for Q2/Q3 spread across all its producing regions). At the same time, while residential construction activity may be holding up better than R&R, the pullback in housing starts in March has clearly had a negative impact on S-P-F demand and expectations. With stubbornly high mortgage rates expected to cool housing demand in Q2 (and potentially beyond) and SYP still trading at a massive discount, further near-term downside for S-P-F prices seems assured.

The incredible run in OSB appears to be over; prices in all major producing regions posted significant ($20–40) declines last week. After increasing from $400 to $545 between late February and early April, benchmark North Central 7/16″” is currently trading at $525 (down $20 last week); elsewhere, 7/16″” is trading between $480 and $600. We expect prices to cycle lower in the coming months (albeit starting from extremely profitable levels by historical standards). Producers will be hopeful that continued supply discipline and further delays (or slow ramp-ups), amid capacity-expansion projects by Tolko and Martco, will prevent an all-out capitulation.

Despite not experiencing the same pricing uplift as OSB over the past several months—plywood pricing has been steady, if unspectacular—plywood prices are also moving lower, and the rate of decline accelerated markedly last week. The Southern Pine Plywood Composite price was off by $19 last week, slipping to $780, while the Western Fir Plywood Composite price has fallen by $18 over the past month to $1,015. Further near-term downside is expected given sluggish demand and anticipated declines in OSB; however, unlike in OSB, where a raft of new supply will come to market over the next several quarters, there are no major capacity expansions on the docket in plywood. Instead, an uptick in offshore imports remains the bigger threat to plywood pricing in the near-term, and, following some recent developments in Brazil, U.S. producers may be bracing themselves for a surge in offshore imports.

Pulp prices continue to move up, carried by the momentum of earlier supply disruptions. The bellwether China market has seen steep price increases for both major grades in the last few weeks. The Finnish transport/general strike has come to an end (for now), but the impacts will linger for several weeks. The various global logistics disruptions are becoming the new normal (i.e., bypassing the Suez), but add costs. In their Q1/24 financial reports, Billerud and UPM both highlighted the impact of rising fibre costs in the Nordics, with Billerud guiding to record pulpwood prices in Q2. Rising costs reflect the elimination of Russian fibre, competition from energy markets and lower sawmill operating rates. European pulp producers will need higher prices to cover rising input costs, and buyers will continue to look for opportunities to offset cost increases. This will include fibre substitution, involving not only BHK but also BCTMP in packaging. UPM emphasized that the Nordic fibre shortage is large (~10MMm3) and structural. The spruce bark beetle issues in Europe are also causing headaches.

Finland is now a larger NBSK supplier than Canada following several capacity closures in the latter. Recent stronger S-P-F lumber prices will have maintained chip supply in Western Canada, but, with warmer, drier weather, fire season is starting earlier and winter log decks are harder to accumulate. Producers have slated $30–40 hikes for BSK in China in May (and up to $80 in other markets). Given stronger markets in Europe and North America, Chinese buyers may take downtime as prices rise given their soft end markets.