Lumber and Plywood

Humans have utilized lumber for construction for thousands of years, but due to the heaviness of timber and the manual methods of harvesting, large-scale lumbering didn’t occur until the mechanical advances of the Industrial Revolution. Total world harvest, including softwood and hardwood, is currently around 4 billion cubic meters per year.

Lumber is produced from both hardwood and softwood. Hardwood lumber comes from deciduous trees that have broad leaves. Most hardwood lumber is used for miscellaneous industrial applications, primarily wood pallets, and includes oak, gum, maple, and ash. Hardwood species with beautiful colors and patterns are used for such high-grade products as furniture, flooring, paneling, and cabinets and include black walnut, black cherry, and red oak. Wood from cone-bearing trees is called softwood, regardless of its actual hardness. Most lumber from the US is softwood. Softwoods, such as southern yellow pine, Douglas fir, ponderosa pine, and true firs, are primarily used as structural lumber such as 2 x 4s and 2 x 6s, poles, paper and cardboard.

Plywood consists of several thin layers of veneer bonded together with adhesives. The veneer sheets are layered so that the grain of one sheet is perpendicular to that of the next, which makes plywood exceptionally strong for its weight. Most plywood has from thee to nine layers of wood. Plywood manufacturers use both hard and soft woods, although hardwoods serve primarily for appearance and are not as strong as those made from softwoods. Plywood is primarily used in construction, particularly for floors, roofs, walls, and doors. Homebuilding and remodeling account for two-thirds of US lumber consumption. The price of lumber and plywood is highly correlated with the strength of the US home-building market.

The forest and wood products industry is dominated by Weyerhaeuser Company (ticker symbol WY), which has nearly $20 billion in annual sales and a market capitalization of over $13 billion. Weyerhaeuser is a forest products conglomerate that engages not only in growing and harvesting timber, but also in the production and distribution of forest products, real estate development, and construction of single-family homes. Forest products include wood products, pulp and paper, and containerboard. The timberland segment of the business manages 7.2 million acres of company-owned land and 800,000 acres of leased commercial forestlands in North America. The company’s Canadian division has renewable, long-term licenses on about 35 million acres of forestland in five Canadian provinces. In order to maximize its long-term yield from its acreage, Weyerhaeuser engages in a number of forest management activities such as extensive planting, suppression of non-merchantable species, thinning, fertilization, and operational pruning.

Lumber futures and options are traded on the Chicago Mercantile Exchange (CME). The CME’s lumber futures contract calls for the delivery of 111,000 board feet (one 73 foot rail car) of random length 8 to 12 foot 2 x 4s, the type used in construction. The contract is priced in terms of dollars per thousand board feet.

Prices – Lumber futures prices rallied through most of 2003, with the market posting a new 2-1/2 year high late in the year. Lumber prices closed 2003 at $312.60, up 44% from the 2002 close of $217.70. The market was driven by the extremely strong US home-building market seen all year. Despite the rally, the market remained slightly below the 3-year high of $376.00 posted in May 2001 and well below the record high of $493.50 posted in March 1993.

Supply – US softwood lumber production in 2003 was on track to fall 1.2% to 35.607 billion board feet from 36.025 billion in 2002. The US leads the world in the production of industrial round wood with 405 million cubic meters of production in 2002, followed by Canada with 197 million cubic meters and Russia with 128 million cubic meters.

The US also leads the world in the production of plywood with 15.494 million cubic meters of production in 2002, followed by Canada with 2.475 million cubic meters and Russia with 1.808 million cubic meters.

Trade – US imports of softwood in 2002 rose to 20.986 billion board feet from 20.075 billion board feet in 2001. US imports of hardwood in 2002 rose to 739 million board feet from 645 million board feet in 2001. Total US lumber imports in 2002 rose to 21.774 billion board feet from 20.737 billion in 2001. The majority of US imports were of spruce with 1.046 billion board feet in 2002, and cedar came in second with 648 million board feet.

US exports of softwood in 2002 fell to 848 million board feet from 968 million board feet in 2001. US exports of hardwood in 2002 fell to 1.219 billion board feet from 1.222 billion board feet in 2001. Total US exports in 2002 fell to 2.312 billion board feet from 2.351 billion board feet in 2001. The largest US export of softwood was of southern pine with 205 million board feet in 2002, followed by Douglas fir with 111 million board feet.