Market Report: Interest Rates and the Wood Products Markets

There are never boring days in wood products markets! Conflicting signals abound and the market is finding scant reasons for comfort.

The wood products industry is typically the tip of the spear for the economy; we feel downturns first but are also the leading indicator when things improve. The biggest issues on traders’ minds all revolve around the macro-economic environment.

We are all obsessed with the latest news on inflation rates, potential interest hikes by the federal government, and the latest housing numbers. Very few of these metrics give the market any sense of optimism in the months ahead.

Inflation is persistent and interest rates will be increased to try to tame that beast. We fear that the government will need to kill economic growth to solve the inflation problem. The most direct effect of interest rate hikes is higher mortgage rates, which is also tied to housing affordability and housing starts. We know that housing starts have lagged necessary growth rates for the last decade and the U.S. is in dire need of more housing, but the government’s tools are blunt, and they must damage the housing market to rein in inflation.

Commodity markets are bloody right now. We are pinched between stubbornly high log prices in the northwest and a panel market that is struggling to find buyers who will risk taking inventory. Conversion costs have increased dramatically and have not shown signs of decreasing. There is still the impression that inventories in the field are extremely light. Purchasers continue to request immediate shipment when orders are placed.

According to Lesprom, Brazilian plywood imports decreased 62 percent through July. Anecdotal evidence indicates that there is wariness to purchase imported products due to certification and performance concerns. We are thankful that cheap imports aren’t contributing to the already difficult decline in product pricing in the approaching quarters.

Unions are flexing their muscles considering high profit margins reported by publicly traded companies. A nation-wide railroad strike seems to be averted in the short-term, and we are thankful for the ability to move our product across the country via rail. However, we know longer-term that rail rates will increase accordingly, which exasperates inflationary pressures.

Weyerhaeuser unions are currently striking, leading to lockouts at local facilities. The strike primarily applies to their lumber facilities in the northwest, so there has been little impact from an engineered wood product perspective. Regardless, shutdowns at any northwest wood products facility will always have unintended and unpredictable consequences throughout the supply chain. We hope for a satisfactory resolution soon.

Engineered Wood Products (EWP) are still the bright portion of the market. The largest portion of our production goes to EWP, so we are thankful that our LVL customers continue to experience strong markets.

Our Mass Ply facility has diversified our product mix and given us the ability to access not only the new mass timber marketplace, but also produce typical LVL grade materials. We look to add shifts and production through that facility immediately and hope that it will continue to grow as the mass timber market develops. We have orders for extremely large buildings in 2023 which should provide a much welcome base of production for all our facilities during what is expected to be a very difficult economic environment.

We consider our greatest core competency the ability to respond quickly to the market as new issues develop. As such, we recognize the current dislocation between log prices and finished good prices. In the short-term, we have decided to reduce a shift of production at our small log veneer production facility.

This decision was driven by extraordinarily high log prices for small logs, declining prices for green veneer, and reduced liquidity for commodity panel products. We don’t intend to let anyone go and we are continuing to hire. We hope to have the shift back up and operating as soon as market conditions allow.