PNW Market Outlook: Japan and China

In 2010, log prices in the Pacific Northwest recovered due primarily to demand from China (see story on Northwest log prices in last month’s issue). Prices have continued to charge upward in 2011, with export prices well over $600 for both Douglas fir and hem-fir. Westside mills producing dimensioned lumber and plywood for the US market continue to be challenged, as high raw material costs are hollowing out their profits.

Some relief may be on the horizon, however. The earthquake and tsunami in Japen are likely to alter theis dynamic. Once Japan begins the rebuilding process, demand for building products from the PNW will start to compete with the demand for logs from China. In the 1980s and 1990s, when the Japanese economy was healthy, many companies in the PNW cut products for Japan. As a result, there is a great deal of Japanese export business expertise on the wood products side in the region. Many of these companies will be looking to maximize business in Japan when the rebuilding effort begins.

To meet demand from both China and Japan, wood products manufacturers will be driven to reduce production for domestic markets, which will drive lumber and plywood prices up. This will provide Westside mills with the ability to make their margins even while paying higher prices for logs.

When will this shift in demand dynamics occur?

Clean up from the disaster has begun and may take as long as three years. In the initial period, panel producers will see a spike in demand from Japan for the construction of emergency shelters. The Ministry of Land, Infrastructure, Transport and Tourism has requested that the Federation of Housing Production construct 30,000 temporary shelters in the next two months. The number of shelters so far requested by the prefectures in Japan is over 33,000. Aid agencies say this number is likely to increase.

Construction of permanent housing will follow. The Japanese National Police Agency has estimated that a total of 18,423 buildings were completely destroyed by the twin disasters. Tens of thousands more were at least partially destroyed. The replacement and repair of buildings will begin during the last part of 2011 and into 2012. According to Madison’s Lumber Reporter, OSB and plywood producers saw an immediate spike in demand after the 1995 Kobe earthquake. Within six months, lumber manufacturers began seeing an increase in demand from Japan, and the full price increase occurred in 1996. We expect to see a similar pattern in the wake of the Tohoku Pacific Offshore earthquake.