Certainly uncertain

           Ironic how certain we currently are that we are facing uncertainty. As much as it is hard to get large groups of people to agree to anything today, we all seem to agree about uncertainty. And by ‘we’, I include myself. We all have to justify, explain, rationalize, project or forecast and the current political trade circumstances and their impact are tough to elaborate on beyond ‘I don’t know…’ However, maybe we know more than we think and maybe the fear of the unknown can be tamed by realizing what we actually do know. 

           First, let’s clear the air with some blunt reality. Regardless of what you think of the present administration, and whether long term the hardline stance on trade works in our favor or not is separate from the localized impact on specific industries. Currently, if you make a living in the hardwood industry, the approach to trade has negatively impacted your business.

 The concept of globalization has been around since the early explorers ventured out to seek new territories to claim. The term globalization referring to a practical business concept is commonly attributed to a 1983 article in Harvard Business Review by Theodore Levitt. The hardwood industry is truly global and has been for quite some time now. Unfortunately, our globalization is centralized heavily around one global entity, China. So, certainly, the current trade stance with China has caused our prices to go down and has slowed activity to this large component of our industry’s global market creating a ripple effect through other hardwood markets.

           However, as certain as the uncertainty about how tariff implementation will play out is, there are some certainties certainly shaping up in our favor too. The US resource is the most reliably legal and sustainable hardwood product in the world. The multitude of certification authorities have created a system of sustainability practices and legally sourced verification that according to commissioned studies shows there is less than a 1% risk of illegal wood entering the US hardwood supply structure. American hardwoods offer a diverse array of aesthetic appearance wood. And US hardwoods are easy to machine and finish in comparison to many offshore hardwoods. These positives create a resource that is most certainly the premier alternative for wooden furniture, cabinet, flooring and component manufacturers to choose from worldwide.

           The hardwood industry production growth since 2010 has been modest and controlled. The most recent recession was detrimental to the hardwood industry with estimates indicating the production capacity dropped 70%. Current production estimates have the industry operating at approx. 9 billion board feet annually which puts the industry capacity back to only 65% of pre-recession capacity. I would submit that with multiple world markets experiencing economic growth, including the US, this level of supply will certainly be strained to keep up with demand. 

           Then add in weather. Weather is the variable that people from other industries shake their head at. Investors from outside our industry marvel at the brazenness of a management team when they include a weather component in forecasting performance. But, being in the hardwood industry, we understand that weather influences are real, for certain. 2018 has been an above average year for precipitation nationwide. NOAA rankings also show that the eastern half of the US has been above or much above average in precipitation this year. Couple that with early 2018 log exports and recent price reductions that have forced recent log price reductions, and the result is log supply across much of the eastern US and particularly the Appalachian hardwood region is low, especially to be heading into winter. 

Finally, I offer a take on demand. The US GDP growth is trending up since early 2016. Manufacturing new orders have been increasing which for hardwood lumber producers secures the bottom portion of our product lines, pallet and industrial materials. One of my former bosses at Coastal Lumber (shout out to Lyman Shipley) taught me to watch the pallet lumber market because pallets lead us into and out of good markets. Housing starts while up and down monthly and quarterly are still trending up since 2014. Chinese manufacturers have ample inventory for maybe 2 months. Chinese distributors have cycled their inventory out and need to replenish to feed an economy that, while slowing, is still growing at over 6%.

           So, I admit there is uncertainty surrounding tariffs and trade relations with our biggest trading partner for hardwoods. And, I am not certain how they will play out or what impact they will have on pricing. But, I am certain that the fundamentals of supply and demand are favorable for the hardwood industry. So, I am choosing to believe that our elected leaders know more than I do and have an ultimately positive end goal they are working toward. I certainly believe that our industry is healthy and resilient enough to navigate this disruption as we have so many others until we can get back to just trading sticks.