After 9 years of relative trade peace, the current Softwood Lumber Agreement (SLA) between Canada and the US is set to expire on October 13th. Dating back to 2006, the SLA has been effective in penalizing the mills when prices drop, and has ultimately helped raise prices back to levels the US has deemed as acceptable.
With all the duties paid by the mills being paid to the Canadian Government and discounts being provided to Canadian consumers, the SLA has been regarded as a win. With several other agreements prior to this, the SLA has been accepted as a successful and effective method of maintaining price levels.
What's next for the SLA?
Once the SLA expires, there is a one year cooling off period in which the US cannot initiate new trade measures. The main point of concern with the Canadian mills is “what will this new program look like?” The speculation is that it will be more punitive with a common belief that Canada would be wise to open discussions now, and try to get a similar or better deal than what exists today. If agreed on by both parties, it could be applied at any time between now and the next 13 months.
What does it mean for the market if the SLA expires?
There are a few scenarios; almost all of which would lead to lower prices. The market is in a slightly over-produced situation. With China no longer taking the volume that they once did, all eyes will be on the US to absorb this increasing volume. If the penalties are removed, the Canadian mills will have unencumbered access to the US market. Add to this the weak Canadian dollar, and it becomes even more attractive for the Canadian mills to sell into the US.
However, the US cannot absorb this volume and prices will likely erode. If the current SLA is not extended or a new one is introduced, the mills will have to remove production from the market, ultimately leading to mill shutdowns. The market as we know it could change but with change could come opportunity. At some point, there will be attractive pricing and opportunity to lock in some favorable numbers for next year. This is purely speculative, however, expect to see a few changes in the traditional market and how it behaves.