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North American Lumber Market

16-30th September 2007


        

 
Fed cuts rates by 50 points, foreclosures jump
The Economist reported on the Federal Reserves decision to cut interest rates by 50 basis points. The move was made to avoid harm to the global economy, due to the US subprime mortgage fallout and weak credit markets. Recent statistics by RealtyTrac also showed that home foreclosures jumped 36% in August. Experts anticipate forthcoming rate cut by the Fed at its next meeting.

Rising demand for American hardwoods for railway ties
Overall, the American hardwood industry is not performing well, mainly as a result of the slumping US housing market. However, there are a few sectors in the industry that seem to have escaped the general downturn. Demand for wood flooring and for wood from transportation-related industries are holding up fairly well. In particular, the markets for wooden truck trailer flooring, pallets, skids, crates, and railway ties remain healthy. The following article focuses on the railway tie industry.

Real GDP growth is one of the main drivers for cross tie purchases. Growth stood at approximately 3%, both in 2005 and 2006. No doubt, a cooling US economy could slow the railway tie market in the next few years, but is not likely to cause a declining trend. Growth may fall below 2% in 2007 and only marginally above this mark next year.

Another important driver is railroad shipments of bulk products. Due to the increase of global trade, railroads have been outperforming the overall economy. Furthermore, the limitation of the Panama Canal requires most ocean vessels from China and other Asian sourcecountries to make use of ports along the US Pacific coast. As a large portion of these products are consumed in the eastern United States, the demand for cross-country railway transportation should remain even more resilient.

Most American railways operate with diesel locomotives. The price of fuel has an impact on railways and by implication on demand for cross ties. Even though diesel prices are forecast to drop and railroads will get some financial relief from falling fuel costs, diesel is still quite expensive by historical standards. Nevertheless, recent experience indicates that the US economy has largely insulated itself from the adverse effects of high fuel pricesby becoming more energy efficient. Energy use in relation to real GDP has decreased substantially during the last three decades. With regard to railways, rising fuel prices may even have a beneficial impact. As diesel gets more expensive, freight shipments shift from trucks to rail.

North American freight railroads are segmented into Class 1 (long-distance) railroads, and Small (short-distance) railroads. According to recent trends the length of Class 1 railroad tracks has been declining by about 1% annually. However, when Class 1 railroads shed tracks, short lines usually acquire some of those lines. Also, the decrease in track length is more than counterbalanced by increases in freight.

As of 2006 the market for North American cross ties stood at 20.4 million units, up from 16.5 million units in 2003. Sales of railway ties increased again this year and may reach approximately 21 million. This would be the highest total in the past 20 years.

Taking the above described economic fundamentals into consideration, the railway tie market will continue to expand in the foreseeable future, but at a slower rate. Freight traffic is slowing down in conjunction with the cooling economy and slower bulk shipments. According to forecasts by the Railway Tie Association, demand may possibly reach 21.5 million units by 2009.

In 2006, 77.6% of the railway tie demand went on account of Class 1 railways, and the remaining 22.4% on account of Small-line railways. During the past few years, Class 1 railways have been loosing market share which was still 82.3% as recent as 2003. Looking into the future, it may be that the Class 1 lines will gain back some of their lost grounds.

Abbreviations

LM        Loyale Merchant, a grade of log parcel  Cu.m         Cubic Metre
QS         Qualite Superieure    Koku         0.278 Cu.m or 120BF
CI          Choix Industriel                                                       FFR            French Franc
CE         Choix Economique                                                        SQ              Sawmill Quality
CS         Choix Supplimentaire      SSQ            Select Sawmill Quality
FOB      Free-on-Board     FAS            Sawnwood Grade First and
KD        Kiln Dry                               Second 
AD        Air Dry        WBP           Water and Boil Proof
Boule    A Log Sawn Through and Through MR              Moisture Resistant
              the boards from one log are bundled                      pc         per piece      
              together                      ea                each      
BB/CC  Grade B faced and Grade C backed MBF           1000 Board Feet          
              Plywood   MDF           Medium Density Fibreboard
BF         Board Foot F.CFA         CFA Franc        
Sq.Ft     Square Foot               Price has moved up or down

Source: ITTO'  Tropical Timber Market Report

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