March 6, 2024
2024 Outlook for the Forest Products Industry
March 2024
Contributed by Paul Jannke, forest industry expert with Forest Economic Advisors (FEA)
STRENGTHENING ECONOMY BODES WELL FOR WOOD DEMAND
Things are looking up for the US homebuilding and forest-product sectors in 2024 following last year’s market decline.
With 11 interest-rate hikes within the past two years, lack of affordability has sidelined many potential homebuyers. Now, however, a much-anticipated recession appears to have been averted, and the US Federal Reserve has signaled it will likely start taking the axe to rates later this year, albeit in small increments. Inflation levels are returning closer to targeted levels, and mortgages, though still lofty, have edged down from their highest levels in more than 20 years. Americans’ spending power is on track to rise in 2024.
Massachusetts-based Forest Economic Advisors, LLC (FEA) no longer forecasts the recession that had been widely expected over the past two years following the economic whiplash created by the pandemic that caused interest rates to swing wildly and inflation to soar. While 2024 has a more positive outlook than the US has seen in the past two years, FEA expects overall economic growth will slow in the second and third quarters. In tandem, growth in construction and manufacturing markets will ease before accelerating in the fourth quarter.
With this positive tone setting the stage, FEA forecasts that both US housing starts and residential improvements (repairs and renovations, also known as R&R) will rise by 1.5% to 1.44 million units in 2024 and by another 8.5% to 1.56 million units in 2025. One main driving force for R&R demand is the relatively high cost to borrow money. This has caused many homeowners to fix up their older homes rather than trade up for a larger or newer home, which would require exiting their lower mortgage for a more expensive one. Though US softwood lumber consumption for R&R is expected to dip 1% this year to 20.6 BBF, it will move up 1.5% to 20.9 BBF in 2025.
Not only will higher housing starts help boost lumber consumption over the next two years, but FEA also forecasts US offshore softwood lumber exports to countries such as China will rise. This will take place as sawmill capacity in the US South—the only region in North America with an excess of harvest-ready timber—expands following heavy investments by producers in recent years.
Housing Demand
In 2023, housing starts dropped 8.8% to a three-year low as steep borrowing rates and high inflation put home purchasing out of reach for many potential buyers. These factors also discouraged homeowners from placing their houses on the market, creating low inventories of existing homes for sale.
Housing starts provide a key economic indicator that represents the number of residential units and houses that have begun construction on a seasonally adjusted annual rate. This measure of new residential construction is closely watched by financial market participants as well as the banking, construction, and real estate industries. The purchase of a new home represents a major capital good that triggers other consumer spending, while housing demand impacts commodity prices such as lumber and copper. Home-construction rates also play an important role in employment levels.
With interest rates still high in early 2024, housing starts are likely to fall early in the year. FEA forecasts this will reach a monthly low of 1.38 million units by April or May before improving. However, FEA forecasts housing starts will be up 1.5% by the end of the year compared to 2023.
This increase will come from strong fundamentals such as extremely high pent-up demand and demographic tailwinds due to the large population of the millennial generation that are now at the age when many are ready to buy their first home. Additionally, the inventories of homes for sale are historically low. This means that the number of homes that need to be built will exceed pre-pandemic levels.
However, there is a risk to that forecast due to supply-side constraints that will limit the number of homes builders will be able to construct within a short time frame.
Single-family houses utilize roughly three times more lumber and wood panels than individual units in multifamily structures such as a condominium. FEA forecasts overall US residential construction, which includes both single-family and multifamily structures, will consume nearly 19 BBF of softwood lumber this year. This will mark a 9.7% increase above 2023, which saw a 10.2% decline below 2022. Another 10.2% rise is expected in 2025 as the economy improves and interest rates are on track to fall, which will increase homebuyers’ spending power.
Softwood Lumber Prices
This overall optimistic outlook will come on the heels of weaker demand on North American sawmills last year, when it dropped nearly 2%. FEA forecasts that Canadian and US mills will see a 2.4% increase in demand this year, followed by a 4.4% rise in 2025, when demand will grow at a faster rate than capacity. The overall impact, however, will be felt unevenly across the continent as weaker demand in some regions will cause more mills to close in the US West and Canada’s westernmost province, British Columbia, while new capacity continues to come online in the US South.
Much of this has to do with lumber prices, as the cost of production is higher in the West. While framing-lumber prices tumbled more than 47% year over year in 2023, they remained 15% above pre-pandemic levels in 2019. The demand weakness that end-use markets (such as residential, multifamily, and industrial builders, as well as home renovators) are expected to experience in the early part of this year, before the anticipated interest-rate cuts in the second half of 2024, means that lumber prices are forecast to increase a modest 1.3% this year.
Fast-forward to 2025, when end-use markets will see growth return. This will coincide with an 18% price surge.
Pulp Outlook
US graphic paper consumption is expected to trend lower over the next five years, averaging 21.4 million tons, 15% below the average of the past five years. This grim forecast is due to the structural shift from paper to electronic media, declining paper-based advertisements, and the dropping volume of mail. The demand outlook for paper packaging is more positive as it is increasingly substituted for plastic packaging and as ecommerce grows. US paperboard and packaging production is expected to reach 56.6 million tons by 2027 as a result, up 9% from 2023.
US pulp production is forecast to fall to 41.1 million tons in 2024. A global slowdown in pulp consumption, coupled with the start-up of new, low-cost capacity in the Southern Hemisphere, resulted in a sharp downward correction in pulp prices. This has caused the permanent closure of over 5.5 million tons of capacity in the US in 2023 along with the indefinite idling of Nine Dragon’s Old Town, Maine, mill. Moving forward, conditions should improve. The nascent signs of a recovery are already appearing, with pulp prices rising off their recent lows and demand improving in key global consuming markets. Nevertheless, the combination of tepid domestic demand and a deteriorating trade position makes further contraction of pulp capacity in the US possible.
In the Northeast, pulpwood prices have remained resilient. Despite weaker operating rates at the region’s pulp and OSB mills, wet weather and constrained logging and trucking capacity kept wood-fiber prices higher than expected. Looking forward, pulpwood prices may moderate if harvesting conditions improve. However, demand for pulpwood should also improve as pulp and OSB markets recover.
Editors: Chris Laughton and Tom Cosgrove
Contributors: Paul Jannke and Chris Laughton
View previous editions of the KEP
Farm Credit East Disclaimer: The information provided in this communication/newsletter is not intended to be investment, tax, or legal advice and should not be relied upon by recipients for such purposes. Farm Credit East does not make any representation or warranty regarding the content, and disclaims any responsibility for the information, materials, third-party opinions, and data included in this report. In no event will Farm Credit East be liable for any decision made or actions taken by any person or persons relying on the information contained in this report.
2024 Forest Products Industry Outlook Webinar
Tuesday April 9, 2024, from 10:00-11:00 AM EDT
On Tuesday April 9, Farm Credit East hosted Paul Jannke of Forest Economic Advisors for a discussion on the economic outlook for the forest products industry; log, lumber, and biomass markets, and other factors that loggers, processors, and landowners should know going into 2024.
Tags: timber, forestry, outlook
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