June Timber Market Update by Dr. James Henderson
Tuesday, July 7, 2009
The depressed housing market and recession-plagued pulp and paper industry continue to reduce demand for timber and pulpwood; however, there are some positive developments that may signal the beginnings of a recovery in late 2009 or early 2010.
The decline in sawtimber and chip-n-saw demand and prices is a direct result of the decline in housing construction. Thus, housing construction volume is the number to watch. Construction of residential housing remains at historically low levels. April housing starts, according to the U.S. Census Bureau, dropped to a seasonally annual adjusted rate of 458,000 units, which is 54.2% below last year’s rate. To put this in perspective, housing starts were just over 2 million units during early 2006. This decline in housing construction has had a profound impact on timber demand. Reflecting this decreased demand, the 2008 Mississippi average standing price for pine sawtimber decreased by over 40% from 2006 price levels.
The pulpwood market has declined since the end of 2008, and demand for pulpwood continues to decline. U.S. paper and paper board output fell 17% over the first four months of 2009 as compared with the same period during 2008. This sharp downturn in the paper industry brought about by the economic recession has resulted in lower pulpwood demand since the end of 2008. Pulpwood prices continue to decline, and as of May, delivered prices were down 20% from the price peaks observed during the fourth quarter of 2008.
The declines in both lumber and paper products have made price cuts and delivery quotas commonplace. Compounding the difficulty faced by timber suppliers is the increasing trend of timber bids being rejected as “too low” as the timber prices continue to decline. Not only are there fewer buyers but fewer sellers as well.
Key to improvement in the softwood chip-n-saw and sawtimber markets is recovery in the housing construction sector. There are some indications that a recovery is on the way. First, the number of homes for sale on the market is declining. A healthy real-estate market should have about a 6 month supply of homes on the market.During the month of January, there was a 12.4 month supply. By the month of April, this had decreased to about a 10-month supply. If this trend continues, new home construction will increase, resulting in increased demand for chip-n-saw and sawtimber. This would also contribute to increased demand for hardwood sawtimber as demand increases for hardwood flooring and cabinets. Improvement is expected because of historically low 30-year fixed mortgage rates and the $8,000 Federal tax credit for first time home buyers. This should help reduce the number of homes on the market and spur increased construction. As a result, industry analysts project a modest recovery near the last quarter of 2009. Improvements in chip-n-saw and sawtimber demand should follow.
On a positive note, the volume of paper mill closures and production curtailment announcements have slowed greatly from the record levels seen earlier this year, suggesting that the pulpwood demand may be stabilizing. However, a real recovery in pulpwood prices ultimately depends on an overall economic recovery, which will result in increased production of paper and paper board products. The outlook for the national economy is slow but positive economic growth which is expected to resume during the second half of 2009.