In 2017, China imported US$8.83 billion of total lumber products from the United States, according to the World Bank. However, 2018 saw China impose a 10% retaliatory tariff on US lumber products and threatened a larger 25% tariff on US$60 billion of total US goods, said Freight Waves Freight Waves Tuesday. The United States has cultivated a strong export market for lumber products in China. Prior to the escalating trade war, the American Hardwood Export Council (AHEC) stated that the growth of the Chinese market would be “unlike anything ever encountered in this industry.” The Council predicted that in the near future 60% of American hardwood goods will be exported from the US, with 54% of exports bound for China.
FreightWaves SONAR found that the average weekly rail traffic of lumber and wood was 3,515 journeys in 2018. The 2Q of 2018 saw the highest average number of weekly journeys at 3,647, as well as the single highest week of 3,838 journeys on May 26. Third quarter journeys declined to an average of 3,535 with the highest week of September 1 having 3,803 and the lowest week of September 8 having 3,059. The fourth quarter was even slower at 3,181 average weekly journeys and saw a trough of 2,164 journeys on December 29.The home purchase sentiment index (a survey of homeowners based on one hundred questions) reported by Fannie Mae (FNMA: OTC US) has declined -8.8 points since May 2018 to 83.5 in December 2018, its lowest point since January 2017. Because prices of lumber and wood products are tied closely to the housing market, the downward trend of the sentiment index is likely to weigh down lumber prices, at least during 1Q 2019.
This is a sharp contrast to 2017, when US forest products exports rose +9%, compared to only a +1% increase in 2016 and a sharp -16% drop in 2015. The main reason for the 2017 rebound was China. Exports to China, the largest US trade partner for forest products, were up +21% from 2016. Producers of southern yellow pine exported +41% more to China in 2017 than they did in 2016. But softwoods weren’t alone in the rebound. The import value of US hardwood products to China reached a record high of US$323 million in 2017. In 1Q 2018, that export value hit US$138 million, an increase of +36.7% year-over-year, according to AHEC statistics. But there is little doubt that when all of 2018 is compared with 2017, the numbers will trend downward. And no one knows at this point what will happen during 2019.
While the US is a major exporter of lumber and wood products, it also imports them. In fact, one-third of the US lumber market is supplied by imports. Those imports into the United States reached a 10-year high of roughly 9.78 million cubic meters in 2Q 2018 before shrinking by -3.5% in 2018’s 3Q. However, 3Q imports were still +10% more than they were at the same time in 2017. There also have been recent changes in trade patterns, with the United States importing lumber from different partners. While Canada supplied 95% of US lumber imports in 2016, that percentage declined to 91% in 2018. This was due in large part to the 20% tariff imposed by the US on Canadian wood products (which also caused US exports of lumber to rise by +9% in 2017). As a result, lumber prices in the US rallied more than +30%, according to Dow Jones’ MarketWatch. Domestic prices rose above US$500 per 1,000-board feet for the first time due to supply constraints in February 2018. But then US lumber prices collapsed during the summer and fall of 2018, with major grade prices dropping -40% from June to November. This decline was due in large part to a corresponding decline in new housing starts during the same period.