Lumber prices rally as market spooked by supply concerns

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Lumber prices have jumped in the past month, as wildfires in Canada raise concerns about supply disruptions while healthy U.S. housing starts boost the demand side.

Cash prices – what sawmills charge wholesalers – have climbed 22 per cent since June 1. They settled last week at US$420 for 1,000 board feet of two-by-fours made from Western spruce, pine and fir (SPF), compared with US$343 on June 1, according to Random Lengths, an Oregon-based publication that monitors wood markets.

Despite the softwood lumber rally last month, cash prices are down 74 per cent since reaching a record high of US$1,630 in May, 2021.

“June marked an eventful month for the North American lumber market, with a confluence of factors catalyzing a tightening in market conditions,” said a research report from Fastmarkets, which publishes Random Lengths.

Key factors that dampened supplies last month included the impact of wildfires in Canada, the lingering effects of previous decisions by producers to reduce B.C. output during a period of low lumber prices, and slowing European wood shipments into the U.S. On the demand side, stronger-than-expected data released in mid-June on U.S. housing starts helped bolster the market.

So far, the vast majority of Canadian sawmills remain unaffected by disruptions from the wildfires, Fastmarkets said, though lumber traders will be watching for any future slowdowns in the supply chain, whether it be transporting lumber by rail or trucking.

On the Chicago Mercantile Exchange, prices for lumber futures for November delivery rose US$5 to close on Friday at US$555 for 1,000 board feet. That’s up 7 per cent since June 1.

“Altogether these supply developments seem to have spooked the market somewhat – as evidenced by the recent rally in futures prices – yet the tangible impact to actual industry shipments and output seems to be more muted,” Fastmarkets said.

There was little movement in cash prices in April and May, but June’s jump reflects recent patterns of rising demand and tightening supply, said Crystal Gauvin, senior economist at Forest Economic Advisors, a consulting firm.

“Part of this is catching up to a more normal price level for spring buying,” Ms. Gauvin said in an interview. “A lot of people have been sitting on the sidelines.”

While supply chain disruptions arising from wildfires were not the primary driver behind June’s bullish sentiment for softwood, the psychological impact of uncertainty lingers as crews battle July fires in the forests.

Cash prices slumped to US$335 for 1,000 board feet of Western SPF in early April. For the rest of 2023, there will likely be continuing volatility and pressure on prices to climb, though a narrower trading range than what the market saw with wild pricing swings from 2020 to 2022.

“I definitely think we’ve hit the low point for the year,” Ms. Gauvin said.

In May, there were more than 1.63 million housing starts estimated in the U.S. on a seasonally adjusted annual basis, according to data released on June 20 by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

“Better-than-expected housing demand is a key factor. The big unknown remains the wildfire season in Canada,” BMO Capital Markets analyst Ketan Mamtora said in a research note about the trend toward higher lumber prices. “A challenging fire season could create short-term production disruption.”

Cash prices averaged about US$524 for 1,000 board feet of Western SPF last September, and since then, the monthly average has mostly drifted lower toward less than US$400, according to Vancouver-based industry newsletter Madison’s Lumber Reporter’s tracking of monthly data.

“As June passed the midway point and questions swirled about overall supply given ongoing wildfires, demand was strong for lumber, studs and panels,” Madison’s Lumber Reporter said.

Lower-cost plants in the U.S. South are still profitable. But in the B.C. Interior, sawmills need cash prices of at least US$525 for 1,000 board feet just to break even.

In the first half of 2023 alone, several B.C. sawmills have closed or scaled back output, blaming timber constraints and low lumber prices. B.C. Interior mills that are still running have been operating at money-losing levels since the fall of 2022.

“Other factors supporting lumber prices in the near term are easing European imports, as well as the lagged impact from B.C. capacity curtailments,” Mr. Mamtora said.

Lumber markets have been volatile since early 2020, after the COVID-19 pandemic initially eroded demand in the first half of that year. In the summer of 2020, people stuck at home started a do-it-yourself bonanza, snapping up construction materials for decks, fences and renovations. But as pandemic restrictions gradually lifted, especially in the second half of 2022, consumers had more options such as holiday travel for using their disposable income.

Canadian lumber shipments to south of the border continue to be slapped with softwood duties levied by the U.S. Department of Commerce, raising prices for American home builders and consumers.

The 2006 Canada-U.S. softwood agreement expired in October, 2015, with no replacement. In the latest round of the trade dispute, Canadian producers have been paying U.S. lumber tariffs since April, 2017.

The chief executive officers at seven major lumber producers in Canada urged the Canadian government in March to step up efforts to find common ground with the U.S., but so far, there haven’t been signs of a breakthrough in the trade impasse.

Forest Economic Advisors estimates that U.S. sawmills accounted for 68 per cent of U.S. domestic consumption of lumber in 2022. Canadian sawmills had 26 per cent of U.S. market share last year, while the remaining 6 per cent was held primarily by European producers.

The current U.S. duty rate is 8.59 per cent for most Canadian forestry firms, but that is expected to decline slightly to 8.24 per cent in August or September.

West Fraser Timber Co. Ltd. and Canfor Corp., however, are expected to see an increase in their duty rates. West Fraser’s tariffs are set to rise to 9.38 per cent from 8.25 per cent, while Canfor’s duties would swell to 7.29 per cent from 5.87 per cent.

J.D. Irving Ltd.’s duty rate is slated to drop to 7.77 per cent from the recent 14 per cent.