RBC Notes September 13, 2021
Forest Products
Lumber Stats: Working through the summer retail slowdown
Event: The Western Wood Products Association (“WWPA”) released June 2021 softwood lumber stats.
North American softwood lumber production increased 1.7% y/y in June – Both countries saw modest y/y gains with production up 1.4% y/y in Canada and up 1.9% y/y in the US. Sequentially, US production was up 2.3% m/m due to a 0.5% m/m increase in the US West and a 3.0% increase in the US South. In Canada, production was down 0.2% m/m due to a 0.7% m/m decline in British Columbia, which was partially offset by a 0.2% m/m increase East of the Rockies.
Operating rates declined in both the US and Canada as producers dealt with steep price declines – According the WWPA, US operating rates fell by 6 percentage points m/m to 84%, while Canadian operating rates fell by 8 percentage points m/m to 79%. In the US South, operating rates fell by 8 percentage points down to 86% and in the West they fell by 4 percentage points m/m to 82%. The BC operating rate fell by 9 percentage points m/m to 75% (from 84% in May). East of the Rockies, the operating rate fell by 8 percentage points m/m to 82% (from 90% in May).
North American softwood lumber consumption was up 3.6% y/y in June, led by growth in the US –
It was a strong month for softwood lumber consumption in the US as consumption increased 6.7% y/y (-1.2% m/m) whereas Canadian softwood lumber consumption was down 14.0% y/y (-1.0% m/m). The m/m decline in lumber consumption is likely attributable to the continued slowdown in repair & remodel activity which persisted through August. By end-market, we believe that new residential construction will continue to show strong y/y growth, which is being offset by a slowdown in repair & remodel markets. Industrial demand and repair & remodel demand are likely to recover as prices normalize and buyers look to finish projects before the winter.
US softwood lumber imports decreased 6.0% m/m – US imports of Canadian lumber fell 7.8% m/m but is still up 21.3% vs. last year. Non-Canadian imports increased by 5.1% m/m to 233 mmfbm, which was driven by both increases in European imports (+6 mmfbm m/m) and Other imports (+5 mmfbm m/m).
US log exports increased 21.0% m/m – According to the WWPA, US softwood log exports were up 21.0% m/m to 160 mmfbm, with an 80.9% m/m increase in exports to China partially offset by a 47.5% m/m decline in exports to Japan. Softwood log exports were up 6.3% y/y as increased shipments to China and Canada more than offset lower exports to Japan and Other countries.
Market update: Lumber markets are moving upward again – According to Random Lengths, the Framing Lumber Composite increased by $22 w/w to $418, posting its second consecutive w/w increase. Traders noted that sales were strong for most species coming out of the holiday weekend, but most continue to take a cautious posture given the market volatility over the past year. Last week, West Fraser also noted that it has adjusted production of BC SPF and US SYP by -5 to -10% over July/August due to wildfires in BC and transportation service interruptions, while also managing inventory levels. We estimate that this will reduce production by ~80 mmfbm during Q3 (range: 60-120 mmfbm).
Key takeaways from the RBC Global Industrials Conference – Last week, we hosted Canfor (link) and West Fraser (link) for fireside chats at the RBC Global Industrials Conference. Notably, Canfor highlighted increased takeaway from home centers which is approaching levels last seen during the peak pandemic period. Given that retail demand tends to be a leading indicator for lumber pricing, we think this bodes well for pricing over the next few weeks despite the upcoming seasonal slowdown in demand