Hardwood Roundtable: The State of the Hardwood Industry – What Lies Ahead?
Hardwood Roundtable: A panel of experts share their insights on the current trends and drivers in the hardwood sector. Recently, the hardwood grade market has suffered some challenging times. How does this affect low-grade markets? What does the future hold for the U.S. hardwood sector?
By Rick LeBlanc
Date Posted: 4/1/2023
What Have Been the Drivers Affecting the Current Market?
Several factors affected the hardwood supply side last year, one being a big price run-up in softwood lumber in the first half of 2022. In the short term is almost always “supply.”
The hardwood industry has recently been going through some trying times. How bad are things? In this latest pallet industry roundtable, we gain insights from five industry thought leaders. They include, alphabetically, Jeff Edwards of Edwards Wood Products, Dr. Nate Irby of the Railway Tie Association, Jim Kesting of Madison County Wood Products, Dan Meyer of Hardwood Review, and Michael Snow, Executive Director of the American Hardwood Export Council (AHEC). Responses have been edited for clarity.
Pallet Enterprise: How Bad Is the Current Market?
Jeff Edwards: It’s a tough market right now, although the crosstie market is good. We’re seeing a good bit of activity now on the board, road and matt side of things. It has been kind of quiet for a couple of years, but we’re building some mats again for the first time since June 2020. It’s hard to make money in the hardwood business right now.
Nate Irby: For railroad ties and timbers, the market is robustly busy, with double-digit production increases from a year ago. However, low-grade hardwood lumber markets, specifically 4/4 red oak #2 (crossties’ direct competition), are down significantly, and are causing some hardwood sawmill operators to shut down temporarily until more favorable pricing returns. Those still operating are doing their best to avoid much hardwood lumber production and focus on industrial products or sawing some allotment of pine to keep their workers busy.
Jim Kesting: We are seeing limited road boards, limited hardwood flooring and grade. Exports are somewhat extinct. I’m unsure about the blocking market, but apparently, it is slow. Most markets are in the tank except for ties, and all our material is still going into pallets at decent pricing. Housing is at a complete slowdown, which greatly affects all wood product markets.
Dan Meyer: We have had a historically dramatic depression in grade lumber prices since July of last year. But taken in context, we had a historically unprecedented price run-up before that. So, if you only look at July forward, it looks much worse than if you look back all the way to the start of the price cycle. From October 2020 to the summer of 2021, prices for many items shot up to record highs, and then held there for nearly a year. Prices have indeed fallen dramatically since July 2022, and faster, in some cases, than they went up. But, again, in perspective, prices for many items recently bottomed out, at levels above their 2020 lows, and are starting to firm again.
This is evident in our kiln-dried price index, which bottomed out at the beginning of February 14% higher than where it was at the start of the cycle. Additionally, over the last 25 years, there have been six distinct hardwood lumber price cycles. During the five prior to this one, the peaks have typically lasted five to nine weeks before prices began falling again. The fact that this one held at or near peak for 11 or 12 months only adds to its unprecedented nature.
Mike Snow: Between 2017 and 2019, red oak exports to China dropped by more than $300 million, but we’re slowly starting to scratch it back. Between 2017 and 2019, red oak exports to China dropped by more than $300 million. And then from 2020 to 2022, we’ve picked up about $120 of that in increased sales to other markets, primarily Europe, Japan, Australia and Korea. We’re starting to see markets that have always been white oak markets starting to look at red oak. So that’s been a real help. I think part of the problem has been that export markets were strong in the beginning of the year 2022 and then slowed way down toward the end.
Pallet Enterprise: What Have Been the Drivers Affecting the Current Market?
Jeff Edwards: While hardwood lumber was still headed to China during their COVID lockdown in the 2nd quarter of 2022, the hardwood lumber market was beginning to soften. By the 3rd quarter, we were seeing lumber shipments backed up at the ports and feeling the effects here. A lot of hardwood lumber producers have scaled back lumber production. Their stance is that we’re going to pay X for logs and that’s all we can afford to pay, due to the current lumber market. And, if we get enough to run two days a week, we’ll run two days or whatever, which has reduced hardwood lumber production.
Several factors affected the hardwood supply side last year, one being a big price run-up in softwood lumber in the first half of 2022. We saw many hardwood mills in this part of the country start to cut pine because it was more readily available. Hardwood mills that might not be optimal yield-wise or production-wise, compared with mills on the pine side, could be when the market was $1,200 for 2x4s. When softwood dropped, they switched back to hardwood and I believe that made more hardwood available later last year.
Another factor, consulting foresters out this way handle most of the private landowners’ timber now and they keep their ear to the ground on the lumber market. They’ll advise the landowners not to sell if they believe the mills are pulling back on what they’re bidding on the timber, and this tends to keep the price up for logs.
Also, the pallet industry is using a lot of pine in pallets now and that’s affecting the hardwood side of things, too, because the pallet industry has historically been the largest consumer of hardwood lumber.
Nate Irby: The drivers for the down hardwood lumber market are complicated, but, in general, just 24 to 36 months ago, the supply/demand curve was such that hardwood lumber pricing rose steeply in acclimating to the market demands, but within the last year, has fallen just as steeply due to insufficient demand and stagnation. Early pandemic-related consumer purchasing exponentially increased home renovations. Coupled with insufficient hardwood inventory on hand and then – lower interest rates, the market became overwhelmed with such high demand. Yet when people eventually went back to work, and the Fed increased interest rates to slow inflation, many lumber buyers had ramped up purchasing chasing market demand. Suffice to say, they were then stuck with a lot of stock on hand and rapidly diminishing demand. Feeble orders ran their course to the point we saw historic low hardwood lumber pricing in certain species/grades.
Jim Kesting: I have said a million times, how can good markets continue when the Fed is hell-bent on raising rates to stop spending and put people out of jobs to curb an inflation problem? They were too late to raise rates and too late to stop them. They are always behind the curve in making meaningful adjustments.
Dan Meyer: The short answer to what drives lumber price changes in the short term is almost always “supply.” Higher lumber prices were initially triggered by bad weather and poor logging conditions in the fall of 2020. Buyers grew concerned, and competition for the reduced supply pushed prices higher. Shortly thereafter, other supply constraints piled on, including trucking and employment shortages. Domestic demand for hardwood lumber also soared in 2021 to levels not seen in 20 years, which worked to sustain the price increases and hold them at peak for so long. Sawmills were finally back to producing at desired levels early in 2022 when the bottom fell out of both export and domestic demand mid-year, leaving producers with high-cost inventories. By early 2023, however, with the exception of a few species like the Maples, excess supplies had been flushed out and prices leveled or started to firm again.
Pallet Enterprise: Which Drivers Are Expected to Continue?
Jeff Edwards: If things do turn around, it will be more of a supply-driven thing, in the short term anyway. I just think with the headwinds on the housing side, domestic business and exports are going to be a little challenging for a little while. I don’t see much changing other than the supply side falling off, which has kind of stabilized prices right now.
Nate Irby: Interest rates will remain high for the next few years, relatively, and housing prices must go down accordingly, but once those find harmony, hardwood lumber might see some more favorable domestic demand and pricing climbs again. Export market potential is also a key factor in the overall health of the hardwood lumber industry, and experts are hopeful in marginal demand uptick in the near future. The primary caution if we see any appreciable demand increase is to avoid over-flushing the market with lumber and stalling any gains. But weather and prevailing production limitations (i.e. supply chain shortages with saws, parts and equipment) and labor inconsistencies should keep that from happening anytime soon.
Jim Kesting: The market will always be dictated by supply and demand. At the present time, supply seems to be up while demand has been slowing. During times like this, corrections take place within every business. Some succeed and some do not. Some mothball production when they can, which can create a lack of supply. We are in a correction period. Everyone knows if inventories get extremely low and bad weather hits the industry, we can be in for another roller coaster ride.
Dan Meyer: There’s certainly a lot of buying activity right now. However, a lot of those orders are being placed to refill empty supply chains in the U.S. and China. Many buyers delayed purchasing when lumber prices were at their historical peaks, letting their inventories fall. Now they are rushing to restock while prices are still near the bottom of the cycle. In addition, though domestic and global economic outlooks are not great, we’re coming into what is typically the peak demand season for furniture and hardwood products related to the home, and most lumber suppliers are still optimistic for at least a small spring bump.
The question on many producers’ minds is whether there is, or will be, any new demand to sustain the market bump once inventories are refilled. If housing stays flat, export markets are slow to come back, and inflation stays so high that consumers don’t buy much, we’re potentially looking at a short-lived rebound. While lumber supplies are tightening, and prices are firming—which would typically trigger higher production—a lot of mills will be cautious about ramping up production too quickly until they have some confidence that underlying demand will grow.
Mike Snow: I think one stat that sticks out is that in 2017, 58% of all of our hardwood lumber exports went to China. And in 2022, that was down to 36%. We picked up in Europe, we picked up in Canada, and in Mexico. Mexico has more than doubled in the last three years. It’s going to be very interesting to follow Mexico, particularly Guadalajara, with furniture manufacturing. Some of these same Taiwanese companies that were the first to go into Southern China, and then Vietnam, now they’re looking at manufacturing in Mexico to get unfettered access to the U.S. market, as well as taking advantage of the fact that the labor in Mexico is less than in coastal China. Mexico is already up 68% in the last two years.
Pallet Enterprise: How Might these Outcomes Affect Low-grade Lumber Buyers such as Pallets and Crossties?
Nate Irby: We postulate due to current low inventories of railroad crossties and timbers on hand, demand for hardwood tie and timber products will remain high for the next 12 to 18 months. We are hopeful sawmill operators can find a sustainable sawing solution based on market dynamics in the present environment and keep the doors open. We cannot afford to lose any more capacity and repeat the 2008 Great Recession scenario of mass permanent closures of sawmills across the wood basket.
Jim Kesting: The outcome is that mills will quit because you cannot mill lumber at the present prices being reported. They will be forced to move their present inventory to whoever makes them an offer. Recycled pallets are building inventories, and requests for new pallets will suffer with lower prices. Some suppliers of lumber products will be forced to quit since you cannot take raises away from your employees, who really do not want to do our type of labor-intensive work when air-conditioned fast food places are paying $25.00 an hour.
Dan Meyer: For the typical grade lumber sawmill, low-grade products are an important but secondary output, such that the output of low-grade material is generally proportional to the output of grade lumber. A strong grade lumber market drives increased sawmill production—assuming logs labor and other restraining factors allow it—which increases the supply of cants, cut stock, ties and timbers, though not by equal measures.
Most sawmills are flexible enough to shift their low-grade production to those products with the highest prices and/or margins. Right now, that happens to be railroad ties. In contrast, pallet cant demand and prices have softened a bit recently. As such, even if grade lumber markets continue to improve and sawmill production increases, more of the increase in low-grade production will go to ties than cants and cut stock. Ultimately, tie demand will fall, or supply will overtake demand, and producers will shift focus to flooring-grade lumber or pallet stock, especially if demand for those items starts to exceed their availability and prices rise.