Exorbitant timber prices imply that money does, in some ways, grow on trees. That’s why loggers are rushing to clear more Southern yellow pine, a common species found across the Deep South. Canfor, a timber company headquartered in British Columbia, said on Tuesday that it would spend $160 million in Louisiana to construct its first-ever sawmill. This comes after West Fraser Timber, headquartered in British Columbia, said in May that it will invest $150 million in expanding five sawmills in the South. Interform, another BC-based timber company, is expanding several of its Georgia sawmills as well.
While new sawmills aren’t expected to start producing two-by-fours anytime soon, increasing output at existing mills has already pushed wood production in the United States to a 13-year high. The US industrial wood output index reached 134.2 in April, the highest level since December 2007, the first month of the Great Recession, when homebuilding and lumber manufacturing came to a stop.
This rise in wood output seems to be driven by basic economics: With timber prices at record lows, producers should be encouraged to increase supply, while consumers should probably reconsider buying at such rates. Except that this increase in wood output hasn’t been accompanied by a return to pre-pandemic lumber pricing. According to industry trade magazine Random Lengths, the cash price per thousand board feet of lumber was $1,391 on Tuesday. While it’s down from its all-time high of $1,515 reached on May 28, it’s still up 288 percent since April 2020. Prior to the epidemic, the cost was often between $350 and $500.
Why aren’t lumber prices dropping faster if wood output is at a 13-year high? Simply stated, demand continues to be very high. New home starts fell 8% in April from a 14-year high reached in March 2021, although they are still up 67 percent from their lowest point in April 2020 and up 22 percent from April 2019. The housing market is still booming. Furthermore, do-it-yourselfers are showing no signs of stopping down: Home improvement sales reached an all-time high in April, up 31% from pre-pandemic levels.
“The backlog is just too large.” Chip Setzer, head of trading and development for Mickey Group, a commodities trading platform, believes there are “too many places to store wood.” “I’ve got consumers in the Caribbean clamoring for more, and I’ve got customers in China clamoring for more.” “Everyone is in a tight spot.”
This unprecedented timber scarcity was sparked by a perfect storm of circumstances triggered by the epidemic, as Fortune has detailed. Sawmills reduced output and sold inventory as COVID-19 broke out in April 2020, fearing an impending housing collapse. The accident did not occur; rather, the exact reverse happened. Americans flocked to Home Depot and Lowe’s to stock up on supplies for do-it-yourself projects, fueled by low borrowing rates caused by the recession. This boom, fueled by a huge cohort of millennials approaching their prime homebuying years, depleted housing inventory and drove purchasers looking for new building. Mills couldn’t keep up with the demand for timber for home renovations and building.
Despite the fact that the scarcity has eased in recent weeks, the larger macrodynamic persists. Because of the strong demand, lumberyards are still unable to build up inventories, putting the whole supply chain under strain.
“That inventory correction will take time to sort out: Mills are producing not only to meet existing demand from construction and manufacturing, but also to fill that inventory hole that we dug in 2020 as demand outpaced production,” says Dustin Jalbert, a senior economist at Fastmarkets RISI who covers the lumber market. “As a result, even if purchasers feel the market is moving in their favor, they can’t cut down on purchases as much as they’d like since demand from builders and contractors remains strong, although slowlying, forcing them to continue placing orders to fulfill urgent requirements.”
Increasing domestic wood output alone will not be enough to help the nation overcome its timber deficit. According to Fastmarkets, Canada supplies approximately 30% of the lumber used in the United States. Canadian softwood, a popular choice among American homebuilders, hasn’t rebounded as fast. British Columbia’s forest fires, beetle infestations, and the sluggish growth rate of spruce trees are all limiting Canadian wood supplies.
Because of the restricted availability of Canadian wood, forestry behemoths like Canfor, Interfor, and West Fraser Timber are ramping up operations in the United States South.
According to Andy Goodman, CEO of Sherwood Timber, “the North American lumber supply chain is in the midst of a rebalancing act, with Canadian supply decreasing and U.S. supply rising.” “For the last 50 years, the bulk of the timber needed to construct a house in the United States has been transported from the United States Pacific Northwest or Canada, rather than from the United States South, which contains the world’s most abundant trees and cheapest fiber.” Lumber produced in the United States South has mostly been utilized to feed the treated lumber markets in the Eastern, Southeastern, and Gulf Coast regions, rather than for residential building. Southern yellow pine from the United States of America must cover the supply gap as demand rises and legacy supply remains stagnant or declines.”
According to industry experts, this growth in the United States South is a positive indication for the lumber sector. Unfortunately for DIYers, it seems that timber costs will not return to pre-coronavirus levels. According to Setzer, the price per thousand board feet is more likely to remain stable in the $600 to $1,000 area in the long run. It all comes down to the reality that demographics and a scarcity of available housing should keep homebuilders busy.
Homebuilders and sawmills both suffered losses as a result of the 2008 housing collapse and ensuing foreclosure crisis. To say the least, that’s an understatement. Even when house demand recovered, builders and sawmills were cautious not to overextend themselves due to the financial and psychological harm inflicted by those difficult years. That ten-year era of cautious construction is to blame for the country’s present housing shortfall, which sawmills don’t expect to disappear very soon. It’s for this reason why they’re growing.
“Low mortgage rates, low volumes of homes available for resale, favorable demographics, increasing acceptance of remote working, and the underlying housing construction deficit due to several years of under-building appear to be positively influencing demand for new housing in North America,” West Fraser Timber wrote in its latest earnings report, shortly after announcing its expansion in the United States. “Strong lumber, plywood, and OSB demand should continue to be driven by an older housing stock and increasing repair and renovation expenditure.”