Crossties

SEP-OCT 2018

Crossties is published for users and producers of treated wood crossties.

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RTA EVENT CALENDAR CONTACT US RTA EVENT CALENDAR CONTACT US ADVERTISE Stella-Jones Corp. Railway Tie Association Wheeler Lumber Nisus Corporation MiTek Industries CROSSTIES • SEPTEMBER/OCTOBER 2018 13 MARKET OUTLOOK The Weather Channel If the above isn't enough to think about, have you been watching the Weather Channel lately? Gordon soaked a number of tie produc- ing states. Florence hit a part of the eastern tie production regions that Gordon missed. Flo's effects have yet to be fully felt in log procurement as rain continues to march across all these regions. In addition to the Atlantic, if the Gulf of Mexico storm machine activates further, worry, not just about the coast, but also the inland effects on tie procurement. Why is this important? Figure 2 illustrates that after August, the two largest procure- ment months for green ties are historically September and October. If that holds true, but Eastern sawmills log decks zero out for any length of time, it's going to be a long winter and very tight spring for tie buyers. And The Biggest Worry For The Hardwood Industry? China. No, not logs to China. With the tariffs and phytosanitary requirements, that's old news. The Chinese economy is slowing. Not only is hardwood lumber demand softening for that reason, but also as much as 20-30 percent of the value of U.S. hardwood lumber exported there has been sucked out of that market since spring. With mills now facing proposed 25 percent tariffs effective Oct. 1, what's next? Higher-grade lumber is what pays the bills for U.S. hardwood sawmills. Given the sharp declines in hardwood lumber sales volumes and values to China, as well as the potential effects from the impending tariffs, business health and resiliency is at further risk for hardwood sawmills. One recent mill equipment sale came about because the owner was simply fed-up with the entire business model. U.S. flooring manufacturers are still buying lumber in a few regions, and their business outlook for product demand seems favorable even if their market share in U.S. homes continues to decline. This market sector has absorbed some of the volume pushed back from China. But only some. As these remaining lumber customers' inventories reach target levels, the interest and ability to purchase lumber displaced by the Chinese marketplace will diminish, if not cease. One recent conversation with an analyst suggested that not only will some capacity be idled but also some capacity could evaporate. Lenders are rather keen on being paid back. Capital borrowed for capacity and facility upgrades is capital (plus interest) that comes due. If the money isn't there, then it's uncertain what may become of less fortunate mills. Idled or non-existing capacity can't be tapped for building air-dry tie inventories. Conclusion The potential silver lining, and it's a thin one, is if the world is really flat for tie demand, as the surveys suggest, inventories may stabilize a little sooner. That is not only in doubt, but also doesn't provide much solace even if true. ISR and inventories are likely to decrease further. Plus, sawmills seem likely to face further disruption by competing products, log availability, sawmill output capacity and timber acquisition at a price that makes sense. The effects of tropical events, and the weather in general, from September throughout the winter is an unexpected wild card, which if played at an inopportune time for mills, increases the potential turbulence. Flat does not mean there won't be waves. Figure 2 Average Monthly Pattern Of Production January 8.0% July 8.3% February 7.5% August 9.3% March 8.4% September 8.8% Apr 8.0% October 9.2% May 8.3% November 7.9% June 8.65% December 7.6% 100.0%

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