Keta Kosman, owner and publisher of Madison’s Lumber Reporter, monitors lumber prices every day. She thinks we are in a new era for the economy. In the 1950s, there was much infrastructure building, it was all a huge boom for the economy for two decades. We're in a similar situation right now, she says. The U.S. administration is talking about big infrastructure projects, which is much needed. These projects don't necessarily build out of wood, but they always use a lot of wood.
Lesprom Network: First, what happened to lumber prices in the last week of May? Are they up again?
Keta Kosman: U.S. housing is most important for the lumber market. The vast majority of Canadian and U.S. softwood lumber is used for home building, especially in the U.S. Home building and house sales has been incredibly strong across North America; the data that we just got for April shows a little bit of a slowdown.
There are some fundamental issues with supply that are making the situation difficult given how strong U.S. housing has been. In the past year lumber prices have tripled. In the last two weeks of May they were mostly flat. At the moment the high, on benchmark dimension lumber item Western SPF 2x4s, was US$1,640 per thousand board feet. However sales volumes were low, as many customers decided to wait if prices would drop.
What has been happening in the past two months? People were starting to think, how crazy this price is! But when you look at the price of a new home in the U.S., it is up by more. Strong existing home sales make more demand for new homes. If the price of an existing home starts to get close to the price of a new home, then buyers look at new homes instead. Strong new home sales makes for more new home building. Last year lumber prices started to get really high – at the time half of what it is now – smaller builders and contractors were pulling back on projects. But the large home builders don't care, they will build, they will raise the price of the house and people will buy at that higher price.
Last year it was a surprise, builders were in contracts they could not change. They could not exit the contract and they had to pay the lumber price but couldn't raise the price of the job. Now they're building into the contract that the cost depends on lumber prices every week. In the past six weeks or two months, the smaller builders and the contractors have chosen to delay because they saw how it happened last year and now are able to plan.
The other important thing is the lumber retailers, because so much remodelling and renovating activity has been going on for the past year. That was something that took everyone by surprise last year. Immediately, when people were working from home, they started putting into their house; adding new rooms and finishing outdoor space. No one expected that, especially the retailers. Normally, the Home Depots and such, they hedge. They go on Futures, and they make long term forward contracts with their suppliers. So even though the producer and wholesaler price of lumber changes with the season and with home building, at the retailer the price is the same. Retailers hedge through the year, so the price on the shelf is the same even though wholesaler prices change. Last year it went up so high so fast that the retailers got caught. This year they were better prepared, and they raised their prices as the wholesaler prices went up. For the past six weeks or two months it got to the point that customers are saying “I am not paying $26 for one piece of wood”.
The retailers do not lead the market. The home builders are the largest consumers of lumber. The retailers can only respond to what is going on with the home builders. In the past four weeks when the price was still going up, sales volumes were quite small. Some people, who maybe just needed to finish their project, or these large home builders who don't care what the price is because they'll just raise the price of the house, they bought small volumes of very specific things they needed right away.
Everyone else was asking what the price will be next week. People either had already got what they wanted or they were willing to wait for weeks. The reason that even in this circumstance the price can stay strong is because the order file at the sawmill is four weeks. If you call a sawmill right now and ask for some wood, it won't even start being produced until the end of June. It will take at least another three weeks for you to receive it. Why would they lower the price? They don't know what the price is going to be in four weeks, customers will have to come back then for another quote.
Right now there is a stasis where we had a long weekend in Canada last week and it's a long weekend in the US this week, which slows things down. The sawmills are running, but the builders and the retailers take a break. So prices stay stable for now.
Last year in October, the price reached a high of around $1,000 mfbm. The previous high was around $550 in June of 2018, which lasted literally two weeks. In October and November 2020, we had the price up to almost $1,000 which lasted six weeks. Then, as is usual in December, the price went down, which is normal for the end of the year. But in the first week of January this year it came back up higher. The normal seasonal price increase is from around February to April, because the large builders and the retailers pre-order so they have their wood in May and June when building really starts. So normally around now the price is flat or goes lower. Unless there are wildfires, or storms, or labour issues.
This month there was a big problem with the Port of Montreal being closed for about 3 days due to a labour dispute. This causes supply chain problems for everything, not just lumber. These situations keep the price high, because uncertainty causes price increase.
Lesprom Network: Can we expect that prices have stopped rising?
Keta Kosman: That's very hard to know. The price of lumber can't just go up forever; people can use replacement materials, people can delay projects. To see what might happen with lumber prices, I am looking very closely at new home prices.
I think we are in a new era, honestly, for the economy. If people remember the 1950s we had Diefenbaker [John George Diefenbaker, Prime Minister of Canada in 1957–1963 - Lesprom Network] and Roosevelt in the U.S. [Franklin D. Roosevelt, President of the U.S. in 1933-1945 - Lesprom Network]. They were doing much infrastructure building. They put in the highway system, it was all a huge boom for the economy for two decades. We're in a similar situation right now.
The U.S. administration is talking about doing big infrastructure projects, which is much needed. Bridges are falling down, for example the sewage system in Boston hasn't been upgraded for 100 years. For these projects they don't necessarily build out of wood, but they always use a lot of wood. Especially in the beginning, for concrete forming, scaffolding, and such. If this funding goes through, there will be a decade or eight years of a lot of building activity.
On the whole, the sales of new homes in April was down a little bit compared to March, but was up a lot compared to April last year. And the price is up a lot. The price of a new home in the U.S. was $290,000 in December 2020, was $330,800 in March 2021, and was $372,000 in April. The inventory of new homes for sale was a little bit better: 4.4 months supply in April compared to 3.6 months in March.
I wouldn't think the price of lumber can go much higher. Previously the normal was $300 mfbm, and we are never going back to those levels again. Sales volumes for the past year are still not that great. It's not only about how high the price can go, it’s also about volume. The sawmills can't really make that much more volume. There have been new sawmill announcements lately, but it takes two years to build a mill so that relief will not be coming immediately.
To understand better: the U.S. only makes about 60% of the lumber that it needs. Of all Canadian lumber, approximately 65% goes to the U.S. In Canada, 50% of all lumber is made in British Columbia. British Columbia has the problem with the pine beetle and the lack of future timber supply.
There is not a lot of room for more supply to be manufactured, so along with the demand-side of home building is the supply-side constraint, and more expected supply constraint coming. It takes 80 years to grow a Lodgepole pine tree. There is timber in the U.S. South, but most builders don’t like to use Southern Yellow Pine for framing lumber. Southern Yellow Pine is good for siding, and for finishing.
In the U.S. the largest cohort of first time homebuyers right now is Millennials. The next generation, they're turning 30 and coming to normal home buyer age. There are more Millennials than Baby Boomers. These don't necessarily want a single family home. They like a community, they don't want to mow the lawn. They want to take their bicycle and go into the pub and take their child to the park and to school. So they want a condo. Condos and townhouses are built out of wood. Five story apartments, the top three floors are built out of wood. There are some big changes to real estate that are happening now and will last for 15 years or so.
Lesprom Network: The U.S. Department of Commerce announced its proposal to double the preliminary tariffs on imports of lumber from Canada to 18.32 percent. How might this affect U.S. lumber prices?
Keta Kosman: That's the administrative review and it happens every year. In April of last year they lowered it from 25% to 8%, and it took effect in November last year. This is the same thing; they want to raise it, taking effect in November. The softwood lumber duty is not about subsidies, it's not about logs. The lumber duty is about collecting $5 billion.
This is Softwood Lumber Dispute #5. Every time since 1980, as soon as the amount collected gets to $5 billion, they start to settle. The Dispute can be at the WTO, it can be at NAFTA. A few months ago the amount collected was $5.3 billion. Canada, the U.S., and Mexico are currently discussing the USMCA (the new NAFTA), and mentions about softwood lumber negotiations are being made. If they get to seriously talking before November, the duty will be put on hold until a settlement is reached.
I note that the exchange rate is extremely important for Canadian exporters. It is a very big deal for sawmills because they sell in U.S. dollars and their costs are in Canadian dollars. Economics works best when the Canadian dollar is $0.75. Right now the Canadian dollar is US$0.83, which is more important than an 8% duty.
Lesprom Network: What is the current capacity utilization of sawmills in Canada?
Keta Kosman: All Canadian manufacturing was impacted very much last year, first by the lockdown which lasted approximately six weeks, then the social distancing requirements at all workplaces. Last year in April then again in June, Canada's sawmill capacity utilization dropped to very low.
The response to Covid in Canada was strong. The US-Canada border was closed even for freight for about a week and a half. These circumstances really dropped supply volumes and it explains the price because it happened at the same time as home building and renovating were going crazy. The latest data for sawmill capacity is for February and it’s still pretty low in Canada, so we’re hoping that as time goes by that it improves back to normal levels.
A lot of sawmills in the US are older and smaller so a good capacity rate for them is 85%. In Canada, there are newer, bigger, more modernized mills, where optimal capacity is 95%. In April last year it was 65%, again in June it was very low.
Lesprom Network: You are also the publisher of Madison's Canadian Sawmill Listings Directory. Is the number of sawmills increasing in Canada, or are companies looking to expand production in the U. S. South?
Keta Kosman: The three largest Canadian lumber companies have been spending five years or longer investing in the U.S. Largely due to the issue of timber supply in BC (the large companies are based in BC) and also because of the duty. Some new sawmills were built, but they also took over sawmills from other companies. I think that they would like to have more sawmills than they do.
The other thing that's happening is the U.S. is the exporting of a lot of logs. Canada’s timberland is owned by the public, managed by the provinces, and there is a large disincentive to export logs. We should be employing Canadians to manufacture and sell wood, the finished product, not raw logs.
In the US, timberland is mostly owned by private timberland owners. The Southern pine forest has a 40 year lifespan. You don't use it, it's going to go die and rot, releasing carbon. For the past year, the U.S. timberland owners have increased log exports instead of manufacturing lumber, while there is a duty on Canadian lumber imports.
Before Covid we were worried there would be a recession. I can't see how a recession would happen now. Inflation, yes. But if people go back to work, if there is a lot of employment and the pay is good, there will not be inflation. It will be a time of growth. If that is the case, there will be a new bottom normal lumber price and 15 years of very robust building for this new demographic. There are huge amounts of people who are entering the age of being home buyers.