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Blog

As Lumber Prices Plummet, Manufacturers are Asking 2 Important Questions

July 08, 2021
Author: Joe Clark

The North American sawmill industry is evolving quickly. Finished lumber prices broke records by significant margins over the last several months, and sawmills have enjoyed tremendous demand and increased profits for their end products despite a tumultuous year. As the market continues to demonstrate volatility, executives are focused on determining what the business landscape will look in both the near and long terms to help inform better decision-making today.

Executives across the solid-wood sector are now looking for the most efficient ways to deploy capital within their businesses. Most are reinvesting back into existing assets, looking to acquire other mills, or building new greenfield facilities. While a high degree of uncertainty will continue to be pervasive in an environment still dominated by unpredictable reactions to the COVID-19 pandemic, there are two recurring questions/concerns we are now hearing.

  1. Is the market becoming overproduced?
  2. What happens when demand falls off?

With more technology-driven, low-cost production coming online in the next two years, a glut of lumber (or shrinking demand) will likely drive high-cost producers out of the market. This will ultimately lower the floor price for lumber – which is where it will inevitably return.

lumber_floor_price

In the next downturn, what existing production will be pushed from “competitive” to “marginal” due to flattening of the cost curve?

When high-cost production is forced out of the Southern lumber market, this will flatten the cost curve across the entire region. Mills that were relatively competitive just a few quarters ago could potentially become marginal producers (mid-4th quartile). Companies with multiple mill assets are now trying to evaluate where each facility sits on the cost curve and which ones, if any, will be at risk when the market changes and a new cost structure falls into place.

Forest2Market has developed a fundamental cost model that can help Southern lumber producers understand which mills are at risk under various scenarios. Using the cost curve to play out various scenarios (worst, moderate, best) around housing demand, remodel demand, etc., Southern sawmillers can better understand the risk of capacity exiting the market, how this will affect the floor price, and where their assets sit on the curve under each scenario.

Sawmillers must prepare now in order to maintain a strong market position and mitigate risk over the next several years. Are you ready to take the next step?

strategic planning for sawmill executives

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