Strong demand, low supply giving sharp push to log prices in the Pacific Northwest

The domestic market for softwood sawlogs in the Pacific Northwest in the first six weeks of 2004 has been under pressure, driven by strong demand, low inventory, and seasonal expectations. As a result, a perceived short-term supply shortfall has strengthened prices significantly, according to log traders surveyed since the beginning of the year.

Except for northern California and the Inland region, where logging activity tends to lag western Oregon and Washington at this time of year, there are no reports by log buyers of 'comfortable levels' in their current log decks. Although situations vary, in general mills are cutting faster than wood is flowing into log yards, leading to widespread reports of drawn-down inventories.

DEMAND. Wood product demand has been very strong as market price reporters, such as Random Lengths and Crow's Publications, detailed again this week. In reviewing the week, analyst Chip Dillon, Managing Director at Smith Barney, pointed out OSB prices are at new all-time record highs and lumber price indices are moving higher. Dillon said "we maintain our upbeat stance on wood products and selected companies with significant wood products exposure." He predicts lumber prices will average $380/mbf in 2004, up from an average of $311/mbf in 2003.

SUPPLY. Log inventory levels were relatively lean late in the fourth quarter of 2003. From mid-December to mid-January the combination of holiday downtime for logging crews and sawmills followed by a two-week blast of fairly severe weather restricted the volume of logs coming out of Northwest woods. At the same time, production has been running even higher this first quarter than last year. The Western Wood Products Assn. figures show that current production is about 8% higher than the average of the last five years throughout the region, but about 16% higher for the coastal portion of that region. From Jan. 1 – Feb. 7, coastal production is 9.5% ahead of one year ago, and orders are up 5.9%.

PRICES. Altogether, the above scenario has pushed log prices harder and higher than has been the case in late January for the past several springs. Some traders are calling it "panic buying," but acknowledge they, too, are cutting faster than replacements are rolling in — leading to some fairly widespread concern or anxiety as inventories drop.

Prices in the Willamette Valley, where the pinch is most noticeable, have pushed Douglas-fir well over $600/mbf, delivered mill, up from the mid-$500s in November. Puget Sound region prices are also up, but not as dramatically. Prices increased in western Oregon by $25 just in late January and most are suggesting the peak is not in sight. There is little premium in either part of the region for a #2Sawmill log vs. a #3Sawmill — most mills are paying what amounts to a camp run price for 8-in.+ fir and whitewoods, largely because so many mills are now 'small-log' mills.

Hemlock sawlogs also have appreciated in price with the generally strong demand/low inventory, increasing between $40-$50/mbf in Oregon and $20-$30/mbf in western Washington this year.

California buying and log trading, as usual, is a little slower to get going because of restrictions in that state's forest practices rules. Small-pine logs prices are firm to a little higher in the $250-$300/mbf range(short-log scale), and activity is reported relatively good. Redwood prices are unchanged at $775-$800/mbf as the season has not really started for this species.

A dominant industrial landowner in the Northwest, Weyerhaeuser Co., provided a small comparison of western and southern log markets, noting in its fourth quarter financial report that "stronger log prices and improved export markets in the West were offset by lower seasonal fee harvest and lower domestic sales volumes. Log prices in the South remained flat, but lower seasonal fee harvest caused a reduction in earnings."

In a recent Forest2Market Southwide Timber Report, the editor noted that a six to eight week delay between lumber price changes and the reaction in log markets is "very typical in the South."

EXPORT MARKETS. Log inventories are also lean in Japan, the major market for Pacific Northwest log exporters. The volume of Douglas-fir, the major species shipped to Japan from the PNW, declined by 7% through Nov. 2003. Prices are, however, relatively steady for export logs, with the bellwether Intermediate Coastal sort, 12-in.+ second-growth Doug-fir, holding steady in the $725-$740/mbf (FAS) range, only slightly higher than the $680-$720 level of a year ago. In general, the domestic, not the export, market is supporting current log prices.

Also influencing the export, and, thus, the domestic, market is the increasing market share for Canadian wood in the Japan log market. One of the major log suppliers in British Columbia, TimberWest Forest Corp., said in its recent financial report that it shipped more logs to Japan last year than at any time in its past, and more than it shipped to the U.S. Through November, the latest month for which figures are available, Canada accounted for 30% of softwood log shipments to Japan from North America, or a little more than one million cubic meters, according to figures supplied by the Japan Wood-Product Information and Research Center (JAWIC) in Seattle. For the full year, TimberWest alone shipped almost 614,000 m3 of logs to Japan.

PULPWOOD and WOOD FIBER. The Forest Resources Association, Inc. reports the inventory of wood fiber at the 22 mills consuming mills in its region peaked in October at 700,000 bdt and has dropped rapidly to a little over 500,000 bdt by the end in January – roughly 17.5 "days of use." The total fiber use in 2003 is estimated to be just over 10.7 million bdt, which is very close to the total consumption in 2002 but substantially below the average of the past ten years, according to Wood Resources International. Through the fourth quarter of 2003, wood fiber costs were unchanged in most regions of the Northwest despite high inventories and a positive near-term fiber supply outlook by fiber procurement managers. Average hemlock residual chip prices were close to $73/odmt (delivered), and Douglas-fir chip prices were approximately $5/odmt lower. Residual prices in the West are currently higher than in the U.S. South.