Globe & Mail Until 2018, the price of lumber had not broken above the US$500 per 1,000 board feet level, holding in a range of US$200 to US$500 per 1,000 board feet. During the initial days of COVID-19, the price of lumber dropped more than 50 per cent. Since then we have seen it rise and fall three times by at least 50 per cent, reaching an all-time high in May, 2021, of US$1,686. Today, we take a closer look at this key commodity.
Factors driving price
Canada is the second-largest exporter of wood products in the world, after China, with lumber being our dominant export. West Fraser Timber Co. Ltd. and Canfor Corp. are among the world’s largest lumber producers, both exceeding six billion board feet annually. Lumber is used primarily in construction with 90 per cent of U.S. homes built in 2019 being wood-framed, according to the National Association of Home Builders.
U.S. housing starts in June were down to 1.6 million annualized units, their lowest level since September, 2021. (By comparison, June housing starts in Canada were 264,000 annualized units).
In July, U.S. housing starts fell further, to 1.45 million annualized units, according to TD Economics. A new home uses, on average, 16,000 board feet of lumber so that decrease means 2.4 billion board feet less lumber consumed each year.
Output from sawmills is driven by price, wood availability and other factors. Mountain pine beetle infestations, wildfires, old growth policy and cross-border tariffs all affect the volume of wood available, lumber produced and, ultimately, its price.
In November, 2021, the government of British Columbia announced its intention to defer logging in 2.6 million hectares of old-growth forests. The preliminary estimate of the impact on the B.C.’s annual allowable cut is a reduction of up to 15 per cent.
On Aug. 9, West Fraser announced it was permanently curtailing 170 million board feet of production at its Fraser Lake and Williams Lake sawmills by eliminating one shift at each location in part because of a lack of timber.
The United States produces 40 billion board feet and consumes 60 billion board feet of lumber on average each year, with most of the difference coming from Canada, where we produce 25 billion board feet annually. Cross-border tariffs on Canadian lumber started in 1982 with a complaint by the U.S. lumber industry that comparatively low Canadian stumpage rates – the price paid to the landowner by unit of roundwood harvested – constituted an unfair advantage, driven in part by the large percentage of forestland that is provincially owned in Canada. (The much higher proportion of privately held land in the U.S. results in a more competitive environment for forest holdings, with landowners able to charge producers whatever the market will bear.)
While the U.S. lowered tariffs this month on most Canadian softwood products by half, the lumber dispute lingers on. Both Canfor and West Fraser’s chief executives have expressed skepticism of any imminent resolution in the near term.
Lumber also experiences a seasonal pricing variability. Large construction companies, home builders and home improvement or hardware stores build their inventory in late winter/early spring in anticipation of a new construction season. Once that surge has passed, sawmills will take seasonal downtime and maintenance prior to starting the new fall buildup of inventory. As well, a number of areas in Canada have roads closed during the spring when full tractor trailer loads of roundwood cannot be hauled, so the sawmills need to build their inventory prior to those seasonal closings.
With lumber priced in U.S. dollars, we should also note the effect of exchange rates on Canadian mills. If, for example, lumber is US$500 per 1,000 board feet and the exchange rate was $1.25 per US$1, a two-cent move in the exchange rate would affect lumber revenue by $16 (Canadian) per 1,000 board feet produced.
Where are lumber prices headed?
During recessionary times, and especially with rising interest rates, we see a slowdown in housing starts that causes a reduction in demand for lumber, thereby softening prices. Rates are expected to continue to climb by at least another percentage point into the new year as a means to slow inflation. We therefore expect lumber prices to remain at or below their current level until the next economic expansion, though a lower than average housing stock and/or reduced wood supply could affect this outlook.