Lumber Party: Economic Bounce Fuels Us Wood Price Rally
Reprinted from the FT – 23/04/2021
Prices soar on booming house sales, beetles, and bottlenecks in the sawmills. Lumber futures have jumped by more than 50 per cent this year as housebuilders and DIY stores scramble for increasingly scarce supplies. US wood prices are racing higher amid a vigorous economic recovery from the pandemic, blasting through previous records as sawmills struggle to keep pace with demand in the run-up to peak homebuilding season. Lumber futures have soared by more than 50 per cent this year to more than $1,327 per 1,000 board feet length as housebuilders and DIY stores scramble for increasingly scarce supplies.
That has taken gains since the depths of the Covid-19 crisis to 400 per cent, significantly above the contract’s previous high of $650 set in 2018. The physical market is also red hot, with the price of the preferred product for wooden framing — 2x4 lengths of Western Spruce-pine-fir — rising 30 per cent since the turn of the year to $1,205, according to lumber pricing company Fastmarkets Random Lengths. That is almost $900 above the average price since 2005.
Market veterans are stunned by the scale of the rally and say it underlines the inflationary challenge facing the US economy as it springs back from pandemic lockdowns that have crushed inventories and production. “I’ve followed these markets for 37 years and I have never seen it go more gangbusters,” said Mark Wilde, analyst at BMO Capital Markets. Lumber is wood that has been processed into beams and planks — a key building material in the US, where around 90 per cent of newly built homes are wood framed. Supply constraints have already sparked alarm; the National Association of Home Builders recently called on US Secretary of Commerce Gina Raimondo to launch an investigation and “seek immediate remedies that will increase production”.
One suggestion is for the Biden administration to reduce tariffs on imports from Canada, the top lumber exporter to the US. The National Association of Homebuilders estimates the increase in lumber price since last spring has added more than $24,000 to the cost of building an average new single family home, which now stands between $300,000 and $330,000. “We are simply not producing enough structural lumber in the US,” said Robert Dietz, NAHB’s chief economist.
“It is part of a broader story . . . of disrupted supply chains and is probably going to create some inflationary pressure in 2021 as we see an uptick in economic growth.” At the same time, the volume of imports, particularly from Canada, which supplies almost a third of US lumber supply, is lower now than it was in 2016 owing to tariffs and a mountain pine beetle that has devastated forests in British Columbia. “It’s the perfect storm of very strong demand and a very slow supply response because of a decade of underbuilding and Covid,” said Paul Jannke of Forest Economic Advisors. Jannke said the seeds of the lumber rally were sown last year. As the pandemic spread across North America, many sawmills reduced production in expectation of plunging demand.
Dealers also ordered less material and ran down their inventories. But demand did not tank. Instead, it was strong as lockdown restrictions inspired a wave of DIY and renovation projects. Lumber prices also received a boost from low interest rates that fast-tracked a recovery in housing demand, as urbanites moved to rural homes. “We’ve been through a decade of underbuilding since the financial crisis so there is a high level of pent-up demand that was released by a combination of low interest rates and the desire to move out of cities,” said Jannke.
The NAHB expected a 4 per cent gain in single family home construction in 2020. Instead, it rose by 12 per cent, bringing the total to a million for the first time since the financial crisis. Activity has remained strong this year, with overall housing starts up 19.4 per cent to a seasonally adjusted annual rate of 1.74m units in March — the fastest pace of growth since June 2006.
Caught on the hop, sawmills and dealers were not able to replenish their inventories. Stocks remain at critically low levels heading into the peak of the house building season. “The sawmill capacity doesn’t exist to produce enough lumber for what is being produced today but that probably doesn’t warrant prices at $1,200,” said Jannke. “Had the inventory been in the system we would probably have seen prices peaking out at around $700 or $800.”
On the supply side, the downturn in the housing market that followed the financial crisis led to a large number of sawmills closing. In 2005, production capacity in North America stood at 80.7bn board feet. Today it is 72bn, according to Forest Economic Advisors. Labour shortages caused by Covid added to supply disruptions.
As they ease and new capacity comes on line, supply could rise 5 to 6 per cent this year, reckons Wilde, helping to address the inventory issue. In the meantime, the run-up in lumber prices is proving to be hugely profitable for big forestry companies such as West Fraser Timber Company.
The Canadian company and several of its peers including Canfor Corp have been buying mills across the main timber growing regions of the US south where prices for logs have slumped because so many trees were plants back in the 1990s. The share price of the Canadian company has jumped 250 per cent in the past year and it is now valued at almost C$13bn (US$10.4bn). “The guy in the middle who is turning the log into lumber is just absolutely crushing it,” said Wilde at BMO. “I think this is the greatest market in my career, which goes back into the 80s, and probably the greatest in the last 100 years for lumber producers. For a southern sawmill operator this is the golden age.”