In the Pacific Northwest (PNW), the forest products industry has rebounded somewhat sooner than most believed it would since the COVID-19 pandemic shutdown that began in March. Lumber demand has surged in recent weeks, log prices are steady, and there is guarded optimism across the board now.
Regional Log & Lumber Demand
There is indeed regional demand for high-quality PNW logs; although prices in March and April trended lower than they were pre-pandemic, there are indications that prices are now strengthening. Home center R&R sales have remained strong throughout the lockdown, and mills that had program contracts with mass retailers continued to meet demand without much disruption.
Housing starts were near anemic in March and April but early reports suggest housing will rebound and pick up as the economy comes back to life, and there is a good deal of optimism in regional mills that supply the housing industry.
- Plywood mills took a more significant hit than did lumber mills over the last few months. However, most of the temporarily shuttered mills are up and running again, and prices are better than a year ago due to tighter supply in the market.
- Prices for finished lumber plummeted during the early part of the pandemic but they have surged in recent weeks. Forest2Market and Madison’s lumber data shows the recent jump in pricing across North America for both southern and western finished lumber products.
As a result of the uncertainty associated with the past few months, regional mills have maintained adequate log inventories, but are now beginning to actively seek logs where they can. It’s a tightrope walk right now, however, as seasonal rainfall in the west is significantly below normal. If these conditions persist, logging operations may be curtailed early as major fire risks will brings operating restrictions.
To get a picture of lumber price performance compared to log price performance, we analyzed benchmark softwood lumber products using Madison’s Lumber Reporter data for North America: Doug Fir Green Std&Btr 2x4, Hem/Fir KD Inland Std&Btr 2x4 and WSPF KD #2&Btr 2x4. Prices for all three products have tracked very similarly since January 2018, so we averaged and indexed them along with Doug and Hem/Fir log prices to get a fair, but broad, representation of lumber price performance compared to log price performance in the PNW. (The chart below illustrates a total change in price as a percentage, not a change in actual dollars.)
Lumber data source: Madison's Lumber Reporter
While the indexed lumber price appears to go through the floor in April, the quick “V-shaped” price recovery is evident. The upward lumber price trend will likely continue in the near term, and I suspect log prices will demonstrate a similar, but less dramatic pattern.
To my surprise, softwood log exports to China have rebounded quickly and they include some additional demand as well. Much of this rebound was the result of a temporary shift in procurement from China, as another major supplier - New Zealand - was in the midst of an extensive lockdown. This pattern is already changing, however, and New Zealand is now actively exporting logs to China again. Due to continued trade disputes PNW prices and volumes are way off, but the Chinese market historically responds when PNW logs are cheaper.
Since January 2018, Doug fir export prices have maintained a markedly higher price compared to domestic logs, suggesting there is some degree of softness in the domestic market. However, with increased trade fears and global economic uncertainty, export prices have recently tapered off in tandem with domestic prices; the current price differential is roughly $30/MBF.
Unlike Doug fir, export prices for Hem/fir began retreating more sharply in 1Q2018 and they have trended downward ever since. However, this is primarily the result of escalating trade tensions with China, which is the largest importer of Hem/fir logs out of the PNW. Like Doug fir, export Hem/Fir log prices have also tapered recently and are tracking slightly higher than domestic logs.
Export prices for both species dropped significantly in April as the pandemic really impacted the global market. Hem/Fir export prices dropped over 11 percent, however, I believe we will see prices rebound when additional 2Q data is released.
Weather & Harvesting
Generally speaking, western forests are pretty dry for this early in the year, as detailed in the regional PNW rainfall for 1Q2020 in the chart below. Rainfall in Oregon alone is about 25 percent below normal; however, sporadic showers currently serve to limit the fire danger and extend the ground moisture further into the summer months. The danger right now is that the PNW could enter a prolonged fire season really quickly when the weather turns dry and hot.
There are few key dynamics to watch as we progress further into what has been an extremely unpredictable year thus far.
- Despite the wild volatility in North American finished lumber prices, domestic log prices have yet to react too significantly. As I noted above, I expect a rebound in lumber prices with plenty of upside opportunity for regional producers over the next few months.
- Domestic and export log prices will demonstrate less volatility, but I also expect to see prices for both products increase and settle in the very near term.
In an economy that seems to be changing on a weekly, if not daily basis, there are a number of big questions right now, chief among them: How will the events of the last few months change long-term habits, and what will be the cumulative impact? Working from home, home schooling, social distancing, mask requirements, etc. have created new social norms. Is there really a need for large commercial office spaces now that companies have learned they can generate great employee productivity remotely without spending a fortune on leasing? Are our global supply chains due for an overhaul? Will the events of the last few months become structurally significant, or will we forget about them by mid-summer and return to “business as usual?”