Sawmills, which were already experiencing disruptions after the wildfires, are struggling as lumber prices drop below break-even levels for the B.C. Interior.DARRYL DYCK/The Globe and Mail
Sawmills in the B.C. Interior are scaling back production as consumers delay do-it-yourself renovations while home builders slow the pace of new construction.
West Fraser Timber Co. Ltd., Conifex Timber Inc., Interfor Corp. and Canfor Corp. have temporarily reduced their outputs by between 5 per cent and 20 per cent in the region, depending on the week dating as far back as late July.
The mills, which were already experiencing disruptions after wildfires in the summer, are struggling as lumber prices drop below break-even levels for the region.
Lumber demand plummets as do-it-yourself boom ends
Prices have fallen sharply since reaching record highs in May. Renovation and remodelling projects lost momentum during the summer, after a year of frenzied buying of lumber by consumers stuck at home during the pandemic.
Cash prices – what sawmills charge wholesalers – have tumbled back to prepandemic levels amid weakening demand from consumers. “Lumber prices will continue to be volatile,” wood business consultant Russ Taylor said in an interview. “It’s going to be choppy since it’s a commodity business.”
Some industry experts speculated in early 2021 that there could be a round of industry consolidation while lumber markets were red hot, but there have not been any major mergers and acquisitions so far within Canada this year.
Instead, Canadian-based forestry companies have mostly opted for share buybacks and, in some cases, also expanded their footprints in the U.S. South, where producers have greater access to supplies of logs compared with Canada. Mr. Taylor said there is a stronger likelihood of Canadian-based lumber producers following a trend of constructing or expanding U.S. facilities, as well as making selective acquisitions of existing American sawmills that have lower operating costs than sites in British Columbia.
Vancouver-based West Fraser said in May that it would spend US$150-million to expand five of its sawmills in the U.S. South. And in July, flush with cash from the lumber rally, the company launched a share buyback program worth $1-billion.
In May, Burnaby, B.C.-based Interfor announced the acquisition of four sawmills for a total of US$375-million in Georgia. In June, Vancouver-based Canfor disclosed plans to build a new sawmill in Louisiana for US$160-million.
Mr. Taylor estimates sawmills in the United States typically have break-even levels hovering around US$400 for 1,000 board feet of two-by-fours made from southern yellow pine. Random Lengths, an Oregon-based newsletter that monitors wood markets, reported that southern yellow pine traded at US$486 last week, so sawmills in states such as Georgia are still making money.
By contrast, plants in the B.C. Interior are especially vulnerable to production cuts when lumber prices fall below break-even levels, as they have in recent weeks. Industry analysts say sawmills in the region have among the highest operating costs in North America, so those facilities are often the first to feel the economic impact whenever there is a downturn in the forestry industry. Those B.C. sawmills also have to scramble to secure a steady supply of logs while paying high stumpage rates – fees levied by the province against companies that harvest trees on Crown land.
CIBC World Markets Inc. analyst Hamir Patel forecast that break-even levels at B.C. Interior sawmills will typically range from US$525 to US$575 for 1,000 board feet during the second half of 2021. Mr. Patel estimates the region recently accounted for 14 per cent of North American lumber production.
B.C. sawmills set their prices based on Western spruce, pine and fir (SPF). Two-by-fours made from Western SPF sold in mid-August for US$385 for 1,000 board feet, down 76 per cent when compared with US$1,630 in May, according to Random Lengths.
There has been a relatively modest pricing recovery, with Western SPF two-by-fours selling last week for US$460 for 1,000 board feet, up 19 per cent since mid-August.
Lumber markets slumped during the early stages of the pandemic, but during a pricing surge that lasted from mid-2020 until the spring of 2021, consumers stuck at home embarked on do-it-yourself projects or hired contractors.
Many retailers are not yet able to pass on the full savings from lower lumber prices to consumers because some of the inventory in stores traces back to when wood prices were higher. While analysts say the roller-coaster lumber market might have bottomed in August, consumers continue to suffer from sticker shock and now have more options for spending discretionary income.
“With vaccination rates rising in North America, people are becoming more comfortable travelling, going out to eat or attending social gatherings, which means more time and money spent away from the home,” said Dustin Jalbert, senior economist at Fastmarkets, which publishes Random Lengths. Mr. Jalbert added in a research note that while demand for new houses remains strong, residential building in the U.S. is being slowed by shortages of labour and various construction materials.
Two-by-fours made from Western SPF sold for an average of US$447 for 1,000 board feet last month, compared with US$800.50 in August, 2020, and US$348.80 in August, 2019, according to Vancouver-based industry newsletter Madison’s Lumber Reporter’s tracking of monthly data.
Lumber prices are forecast to remain below break-even levels at B.C. Interior mills for some of this fall. Some stability could be in the offing in 2022, with industry experts expecting an average price for Western SPF next year of US$500 to US$600 for 1,000 board feet.
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