Forest Products Industry Outlook
Horizon recently released its Forest Products Industry Outlook, a document which provides a current assessment of forest products industry in Pennsylvania.
Thad Taylor, executive loan office and forest products specialist, shared highlights from the Outlook document and his perspectives on the forest products industry. Listen to the full podcast episode with Thad here.
Please share a high level overview of your perspective of market conditions in the forest products industry.
Our Pennsylvania forest products industry faces many challenges right now. The global COVID pandemic and trade-related issues in recent years have created challenges specific to both pricing and demand for many forest products.
First, Pennsylvania kiln-dried hardwood-grade lumber prices are down about 11% year-over-year versus 2019, and down about 27% from the mid 2018 highs. That reduction is somewhere around $375 per thousand since the high point recently in 2018.
Second, Pennsylvania timber stumpage prices are down about $326 per thousand board feet, which is about 36% reduction since the mid 2018 high. That may sound like some help to the industry from a lumber production and margin standpoint, but that reduction isn't quite enough to offset the $375 per thousand board feet reduction in average lumber pricing. In addition to that, hardwood saw timber stumpage sales happened to be the main product for most of our Pennsylvania landowners who sell standing timber. So, to the extent that stumpage price reduction helps some of our sawmill clients, it certainly hurts some of our standing timberland management clients.
The third item is Chinese tariffs and weaker overall Chinese economic demand. Economists can debate whether the tariffs hurt the Pennsylvania forest products industry or the weaker Chinese economic demand to hurt the industry. I think both happen to hurt our industry, and until the Chinese economy picks back up along with the global economy, I think we're going to have some headwinds for overall foreign demand for Pennsylvania forest products. Our industry is somewhat dependent on foreign demand for our forest products.
Next, export demand for U.S. hardwood lumber is down about 25% in 2019 compared to 2018, and down another 18% year-to-date, May 2020. That has been a significant impact on lumber demand and pricing in Pennsylvania.
Finally, I'll mention pulp and chip demand. Both of those items are down right now in Pennsylvania and throughout the New England region, mainly because of the types of paper that are produced in the paper mills in this particular region. Both pulpwood and chip demand are down. In addition to that, palette blocking industrial lumber railroad tie markets, which were a bright spot in 2018 and 2019, have started getting tight.
Those are some significant challenges, but not everything in the industry is challenging right now. There are some bright spots. One would be diesel fuel prices, which are a huge part of the cost structure of any logging operation and indirectly, then, part of the cost structure for any sawmill operation. Diesel fuel prices are low right now. They're considerably off their 2018 highs. I think they're down about $0.75/gallon, retail basis since the 2018 high. The logging weather, which has been historically unreliable every spring and summer, has been terrific for both June and July here in 2020. We've had good sunny weather with very little rain. A final bright spot is both sawdust and bark demand, which have been very difficult the past few years, seem to be better right now. Both wood pellet manufacturing is consuming a lot of sawdust and various landscaping projects are also consuming a lot of bark and bark mulch.
Within the Forest Products Industry Outlook, the document outlines six items on a forest products industry ‘Watch List.’ What is on the Outlook’s Watch List?
There are six items on the Forest Products Industry Outlook Watch List. It’s important to note that they are not all the negatives. They can be some positives or can be anything that we find occupying our mindshare to consider.
1. COVID-19: The global pandemic has caused disruptions to supply chain. It has changed economic growth substantially. We're in a recession now because of the impact to overall economic activity, and restrictions on movement and purchasing behavior. Those things are a big concern. It's hard for me to make any predictions given just the scope of the unknown and uncertainty that surrounds what might happen next regarding economic performance in response to that.
2. Interest rates: This is a positive. Interest rates are very low right now. The Fed has reduced interest rates to near zero and wants to keep them there. I will say that anytime there is a rapid change in interest rate, it doesn't happen in a vacuum. No matter what the reason for the change in interest rate, there's always going to be some kind of distortion that happens in normal purchasing behavior, in human behavior that follows that change in interest rates. So, we might see asymmetric changes in asset values as people use the low interest rates to take advantage of additional longer-term purchasing opportunities they might not have otherwise made. I say all that to say it, it does create some changes, and disruptions, and distortions to normal purchasing behavior and asset values.
3. U.S. housing starts: U.S. housing starts were on an upward trend going into early 2020 until COVID-19. Since then, both U.S. and Northeast housing starts have fallen off a cliff. As housing goes, the forest products industry tends to have economic performance that responds in lock step with U.S. housing. Until U.S. housing recovers and steadiness returns to the economy from the COVID-19 pandemic, I think housing is going to be a concern area for us.
4. Labor: Labor has been a concern for our industry for many years. This is a decades-long change in the skilled labor force, skilled labor available ability, and simple technological trends in our economy has impacted labor availability. It’s going to continue to be a concern. One of the potential long-term solutions we've seen is that many operations have tended to address their labor concerns by adding additional technological capital or machinery capital.
5. Upcoming U.S. election: Before any election, we tend to see purchasing behavior get a little bit more cautious. We tend to see normal levels of risk taking back off a little bit in the months before any election. That's irrespective of which political party is in power at the time. It’s clear that the upcoming election is on all of our minds and is dampening purchasing behavior and risk-taking behavior.
6. Invasive pests: Within our Forest Products Outlook, we highlight the Spotted Lanternfly and the Spruce Bark Beetle. Both pose direct risk to plant health and mortality from an economic standpoint. One of the things that's always concerning is when quarantine zone boundaries change, creating barriers for trade and for logistics. It tends to be a disruptive force.
Are there any other thoughts you'd like to share today?
The forest products industry is something I am passionate about at Horizon. Forests cover about 60% of our state's land base, and it's always going to be an important industry for our state. The industry is very important to Horizon. It's a large portion of our loan portfolio and a focus for a lot of our time, talent, and treasure here at Horizon. And we want to make sure we stay abreast of everything that is happening in the industry so we can ensure we serve the market appropriately.