A number of important lumber-related developments have come out of North America over the last week:
The US-Mexico-Canada Agreement (USMCA)
The USMCA was recently inked, which does not mention softwood lumber specifically but does renew the very important Chapter 19 dispute resolution mechanism. With the negotiations of the USMCA now complete, this leaves open the possibility that the US and Canada may now focus on resolving the contentious trade disputes regarding softwood lumber. It is noteworthy that the Chapter 19 dispute resolution mechanism was left in place, which gives each country the right to challenge anti-dumping and countervailing duties in front of an expert international panel.
United Steelworkers Strike Notice
The United Steelworkers issued a strike notice to northern British Columbia sawmill operators. British Columbia’s (BC) Quesnel, Williams Lake, Lake City and other operations in Prince George, Houston, Burns Lake, Fort St. James, Mackenzie and Fort St. John. The union representing roughly 2,000 sawmill workers in Northern BC, including Quesnel and Williams Lake, recently issued a 72-hour strike notice.
The most recent development as of this writing is that BC sawmill workers have now been banned from working overtime hours, which can make it difficult for producers to quickly adjust to market conditions or the arrival of fresh logs to the mill.
Erratic US Housing Market
US homebuilding was up in August but existing home sales slowed as prices have soared out of reach for many buyers. The US housing market—already struggling with tight inventory and rising building costs—faces a fresh headwind as 30-year mortgage rates rise close to the 5 percent threshold for the first time in years. The rise in mortgage rates so far this year means a potential homebuyer would pay about US$35,000 more interest on a US$220,000 loan over 30 years. Home prices are also soaring in conjunction with mortgage rates.
A recent article in The Financial Times notes that “If you look at the 20-city Case-Shiller index of home prices as a whole, there would seem to be little cause for concern — it is just 2.4 percent above its 2006 peak. And yet, there is a huge divide between the winners and the losers. Ten cities have set new highs and their prices are 23 percent higher on average. The best performer, Denver, is a whopping 54 per cent above its pre-recession peak. Meanwhile, prices in 10 laggard cities are an average of 11 percent below their pre-recession peaks.”
In a strange twist, foreclosed homes in the US are appreciating faster than the typical US home, said Zillow. “Throughout the recovery, foreclosed homes have gained 74.5 percent in value, compared to about 46 percent for all homes. This means that homes that were foreclosed on during the housing crisis have made far greater gains in value than the typical U.S. home.”
It’s still too early to tell how the USMCA will impact the North American softwood lumber trade, and if the potential labor strike will impact near-term pricing. The erratic performance of the US housing market, skyrocketing prices and the widening gulf between the “winning and losing” metro areas, however, is worrisome for the long-term sustainability of a housing market that has slowly clawed its way out of a massive pit since 2008.
All of these factors appear to be combining to produce a level of uncertainty in the market. Prices for 2x4 dimensional lumber have dropped precipitously since hitting an all-time high in June; Douglas fir green 2x4s are down nearly 50%. The table below provides a comparison of the all-time high prices (June 2018) and current prices (mid-October 2018) for benchmark dimension softwood lumber 2x4s vs. their previous historical highs of 2004/05: