Log prices in Pacific Northwest Begin Correction after Six-Month Run up

Log prices in the Pacific Northwest have reached a tipping point, according to Forest2Market, Charlotte, N.C., USA. Prices have begun a correction cycle in response to faltering building products market. China—flush with logs—is likely to re-evaluate its aggressive buying strategy. Historical precedent suggests the price correction will shave 10% - 15% from the price of Douglas fir and hemlock logs.

The correction follows a two-year period of generally rising trends for log prices in the Pacific Northwest coastal region. Market price data from Forest2Market's Delivered Price Benchmark shows that hemlock log prices doubled from their 2009 lows on Chinese demand. Douglas fir logs climbed to more than $600/MBF for the first time since 2007 as competition between sawmills and exporters met head on. As a result, prices increased by 35% over 2010 lows.

"Frenzy has driven the market in early 2011," says Gordon Culbertson, Forest2Market's Pacific Northwest Regional Manager. "Prices accelerated too far too fast, and the market cannot continue at that pace."

While a price correction is underway, Oregon and Washington log exports to Asia are still on track to top a billion board feet in 2011; shipments to China will lead the way. Since exports will remain strong, prices are unlikely to fall below last year's levels. The most recent price correction in summer 2010 amounted to a reduction of 15% of log price. Expect a similar contraction this year. With continued competition from Asian buyers, however, prices will settle at levels above those seen in 2010. According to Culbertson, a number of factors have come together to create this price fluctuation.

Russia has historically been China's largest supplier of logs. When Russia threatened higher tariffs on logs in 2008, China sought to diversify its supplier base, in part to demonstrate to Russia that it had other options. Early in 2010, China saw a target of opportunity in depressed U.S. markets and soon began buying Pacific Northwest logs to feed its growth. Intense competition between domestic and export buyers stimulated prices.

Currently, the cost of logs delivered to Chinese sawmills exceeds $1,000/MBF. "China is price sensitive," says Culbertson. "Paying $1,000/MBF appears counter to their long-term buying strategy. High cost logs from the U.S. are no different than high cost logs from Russia. And since China currently has an abundance of logs and lumber from new sources, it is a perfect time for that country to seek a lower price in the future."

China has established itself as a major presence in the U.S. market for logs. Growth for China is projected to continue, so they will remain a major force in the PNW market. When the housing market recovers and lumber demand rebounds, a second round of competition and price escalation will ensue.

TAPPI
http://www.tappi.org/