This is the second in a series related to Forisk’s Q1 2015 forest industry analysis and timber price forecasts for the United States.
We use “sensitivity analysis” to test the relative importance of inputs in our models. Is this assumption credible? Is that assumption viable? The process clarifies our understanding of the relationship between wood costs, timber prices and North American softwood lumber production. A previous post summarized the reliance of U.S. lumber users on three key sources of supply: the U.S. South, the Pacific Northwest, and Canadian imports. These three account for 95% of the softwood lumber consumed in the United States.
Forisk’s Housing Starts Base Case for 2015 assumes 1.176 million housing starts in the U.S. This corresponds to an estimated 46.08 billion board feet of softwood lumber consumption, an increase of 7.5% over 2014. Sensitivity analysis asks for quantitative assessments of the key assumptions driving forecasts related to regional capacity, profitability and raw material costs in 2015. For example:
- Housing starts. An accelerating housing market that approaches 1.3 million housing starts in 2015 instead of 1.2 million (you never know) would require an additional 1.5-1.8 billion board feet of softwood lumber. To fill this demand, production in the U.S. South, instead of increasing 8.5% would need to grow production over 14% above 2014. Alternately, a slower housing market, one that hovers below 1.1 million housing starts, depresses wood demand and timber price growth.
- Canadian softwood lumber imports. Canada remains a top three source of U.S. softwood lumber. If Canada can import an additional 1 billion board feet of softwood lumber above and beyond the Forisk Base Case, Southern sawmills would only need to increase softwood lumber production by 5% over 2014. This would benefit sawmill wood costs and depress timberland investment returns.
- Western softwood raw material supplies. In the Pacific Northwest, timber supplies from private lands, not demand from Chinese buyers, represent the critical constraint for softwood lumber production. In 2014, softwood sawmills in the West produced approximately 14.4 billion board feet. In the Forisk Base Case, Western production exceeds 15 billion board feet in 2015 and exceeds 18 billion board feet within four years, levels last approached in 2006. While we can quantify the capacity of Western sawmills, we continue to challenge the resiliency and availability of softwood grade supplies.
Prioritizing assumptions also provides context. Housing starts, while the most critical of all factors, do not drive softwood lumber demand and production in a vacuum; rather, housing starts serve to proxy overall economic activity. Over 90% of softwood lumber demand relies on three core markets: home construction, repair and remodeling (R&R) and industrial applications. In the end, key inputs remain sequential, with demand the necessary catalyst driving timber prices and forest investment performance.