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March 2011 Commodity news and trends
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Tropical lumber and processed wood products prices rose steadily throughout 2010 and for the first part of 2011, and are currently around 10% higher than their level in the last quarter of 2009.

Lumber and sawnwood markets around the world have always been intensely competitive. Wood and wood products are one of a very few agricultural products which are grown everywhere, in all climates, and are consumed everywhere. But lumber production is also capital intensive, requiring skilled labor with the right equipment for felling logs and sawing, and the roads and heavy transportation equipment to bring the product to market. So when demand for wood products moves to a higher plateau, as is happening now, the result is higher prices in the short-term until supply catches up with demand.

Lumber from tropical and temperate climates are different (hardwood versus softwood), but are still substitutes for most major uses, such as building construction, the most widely used types of furniture, and for pulp and paper. Because wood has a large weight-value ratio, locally grown wood is always at a competitive advantage in local markets, particularly since early 2009, after hauling costs rose by a tremendous amount and became more variable. There is always a a major incentive to process wood products close to production, with most sawnwood, plywood and furniture consumed close to the wood source.

So there is a link (highly variable) between worldwide hardwood and softwood prices. Tropical hardwood prices are generally at a premium due to greater durability, even after the tremendous advantage of greater supply from tropical countries due to climate conditions favorable for year-round growth and processing of forest products. But the hardwood-softwood price link is often inverted because of the large volatility in softwood prices. Right now, the price differential is highly favorable for tropical hardwood exports.

Take away the current month-to-month fluctuations in demand as the world economy sputters toward reflation, and the it is difficult to see how other factors, put together, are going to have a significant impact on prices. Some of these other factors which are working in the direction of upward pressure on prices include climate change-related actions to preserve forests, increases in royalty rates on cut lumber, and increased demand for wood in its role as a renewable fuel sources. A supply factor working the other way are efforts to prevent illegal logging and to avoid royalty payments. A continued factor around the world will be efforts to restrict low-cost imports from other countries using anti dumping measures, such as in Korea. Increased urbanisation in tropical countries has generally reduced the pressure for more agricultural land, with the important exception being Africa.

Putting things together, the expectation is for continued moderate upwards pressure on tropical timber and wood products prices.

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