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Blog

Have Lumber Prices Found a Floor?

July 28, 2021
Author: Joe Clark

Southern yellow pine (SYP) lumber prices have crashed over the course of the last nine consecutive weeks to the lowest point in nearly 16 months. Forest2Market’s SYP lumber price composite for the week ending July 22 was $415/MBF, a 65% decrease from the record high of $1,202/MBF posted just two months ago.

SYP_July_2021_2

The pullback was inevitable. However, prices aren’t likely to stall for very long.

Fortune noted last Friday that, “Over the past two days, the September futures contract price is up $105, or 19%, to $647 per thousand board feet of two-by-fours. On Wednesday and Thursday, trading was halted as futures hit their daily increase limits.”

Raging wildfires in Western North America have drastically impacted timber supplies, which will pinch lumber production in the region for the foreseeable future. Producers are working through inventories that have only recently been replenished, but those stocks won’t last long.

The fires are affecting both sides of the US/Canada border:

  • As of last Wednesday, 300 fires were burning in British Columbia (BC) including the Sparks Lake fire, the largest of the season at over 140,000 acres. As of this writing, data from BC Wildfire Service indicates that over 1 million acres in the province have burned since April 1, prompting a provincial state of emergency. Thousands of affected residents have already been ordered to evacuate their homes, and an additional 16,000 properties remain on evacuation alert.

  • In the western US, fires have collectively torched over 1.5 million acres, according to the National Interagency Fire Center (NIFC). The Bootleg Fire in southern Oregon has burned over 400,000 acres thus far—an area roughly the size of Los Angeles.

To protect employees, facilities and equipment, regional lumber producers have been forced to react. Canfor Corporation was the first to announce that it is scaling back production at its BC mills. The company expects to reduce output at 10 mills by roughly 115 MMBF during 3Q, and similar announcements from other regional producers could be forthcoming.

Fortune added that “Any disruption of lumber supply from British Columbia—which exports 90% of its output—is bound to send prices higher. Even before the pandemic, softwood production in Western Canada was limited by a combination of past fires, beetle infestations, and the slow growth rate of spruce trees. Ongoing wildfires are just the latest obstacle lumber producers face in their struggle to meet enormous demand.”

 

Will Lumber Prices Skyrocket Again?

As we wrote earlier in the month, lumber prices are so unstable because there are simply too many moving parts and too much noise for the market to find equilibrium. There are, however, a couple of dynamics to watch in the near term:

  • High housing costs continue to be a real roadblock for first-time home buyers, and the pace of growth could be slowing as a result. While housing starts jumped in June, permits were down sharply (-5.1) suggesting that homebuilder outlook may be weakening. The median US home price in June was up 23.4% Year-over-Year (YoY) to an all-time high of $363,300, and the average loan amount also hit a record high of $392,370. At the same time, new home sales in June fell 6.6% to the lowest level since April 2020, and mortgage applications to purchase a new home dropped nearly 24% YoY. Taken together, this data suggests there’s not much room for growth in the current market. 
  • Fire-induced log supply constraints are hitting western North America and more production will shift to Southern manufacturers, who are already running at 90% capacity. There’s simply no slack in the system right now. If fire crews make enough near-term progress to allow western production to continue running through the summer, this capacity will go a long way in helping to prevent another major price run-up. That said, the West is experiencing a severe drought situation, and fire activity is expected to be above normal through the end of September.

This combination of factors—flat/decreasing demand from the home construction sector and decreased lumber production capacity–could result in a market that is better attuned to current needs than it has been in recent months. This would limit substantial price reactions in either direction, which would provide some much-needed stability. However, these developments could also suggest that the market has overcorrected amid shifting production and demand patterns—which have been exacerbated by uncertainty and noise in the larger market.

Either way, I believe lumber prices have found a temporary floor in the low $400/MBF range, although more volatility is almost certainly around the corner.

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