Forest Fires Ignite Lumber Market
Raging B.C. Blazes Fueling Surge in Market
Photo Credit: Mark Thiessen
The lumber market caught fire, literally, the past two weeks as forest fires, mainly in British Columbia, have closed lumber and OSB mills, and suspended logging operations throughout the province. Over 40,000 people have been evacuated from the B.C. interior, the largest lumber producing region in Canada. Dozens of lumber mill operations have been shut down by West Fraser, Tolko, Norbord, and Canfor as over 150 fires are burning province-wide. In addition, many mills throughout British Columbia have curtailed production because they cannot get log supplies, as numerous logging operations have been suspended due to dangerous conditions in the forests. As a result, lumber markets have surged to heights not seen since 2013.
Of course, all of this is on the heels of the well documented trade dispute between the U.S. and Canada that has bolstered lumber prices and awakened volatility in the market since the start of 2017. Builders are reeling from the duty-induced 20 percent jump in lumber prices that hit in the first quarter of the year. The increase was a result of Canadian mills raising prices to cover the anticipated counter-vailing duty announcement that came in late April. When the announcement came, and was not quite as high as some expected, the market took a breather for nearly two months giving back about have of that increase. The lumber market started firming in early June as the Anti-Dumping portion of the trade investigation was due to be announced. When that preliminary ruling came out at less than 7 percent, the general consensus throughout the industry was that this thing may calm down now that we have a little clarity. Enter the effects of Mother Nature, when lightning strikes ignited dry forests along the Fraser Plateau and winds whipped the fires into major catastrophic events. The delicate balance between lumber supply and lumber demand had been disrupted and this interruption of production has sent markets into a frenzy. Contract Lumber’s Framing Index has jumped over $35 since July 1st and currently sits at $410.44 mbf, its highest level since April 26th, 2013. Our index is up over 28 percent compared to where the market started the year.
When looking at the individual components that compose our index there are several notable items worth mentioning when tracking them from the first of the year. The two products that have shown the largest percentage of increase are two of the most widely used products on any structure, studs and wall and roof sheathing. Spruce-Pine-Fir (SPF) Western Studs have increased 44.06% and 7/16” Oriented Strand Board (OSB) sheathing and roof decking is up 40.07%. Other products that have shown significant strength are 2 x 6 Western SPF + 43.49%, 2 x 4 Western SPF + 32.69%, 23/32” T & G OSB decking + 30.23% respectively. The only products in our index that have not had increases are 2 x 10 and 2 x 8 Southern Yellow Pine (SYP) that have remained relatively static since January. OSB is of particular interest because that number has been grinding upward for most of the year. It is also a product that has not been appreciably affected by western Canadian fires.
It is not unusual for fire season to impact the lumber market but it has been over a decade since we've seen anything close to this type of tangible disruption. The forests in western Canada are ladened with dead lodgepole pine trees in the wake of the Pine Beetle infestation from a few years back. The dry fuel buildup has made for serious fire danger in many areas of Canada and the fire season is projected to be very active across the region. Not that the construction industry needed a natural disaster to wreak havoc on the lumber market. Politics were perfectly capable of disturbing any natural harmony between supply and demand well before the first lightning bolt of the season. The Trump administration has now imposed a combined countervailing and anti-dumping duty of 26.75% to all Canadian lumber coming across the border. These preliminary rulings are set for final determinations in early fall with extensions likely to be filed. One interesting development has been the fact that, by law, the preliminary CVD penalty can only be collected for 120 days once it hits the Federal Register, and therefore can only be in effect through August 25th. The current date set for final determination is September 6th, so depending on whether there is an extension will determine how long of a “duty-free” period there is on Canadian lumber shipments this fall.
Obviously, this could all be a moot point if U.S. Commerce Secretary, Wilbur Ross and Canadian Minister of Foreign Affairs, Chrystia Freeland can forge a lumber trade agreement between the two countries. There are unconfirmed reports that the Trump administration is eager to strike a deal on lumber prior to NAFTA talks with Canada and Mexico that are scheduled for August. Some sources even go as far to speculate that the two have reached agreement on the framework for a deal that would include a quota that would limit shipments on Canadian lumber into the U.S., essentially controlling their market share. If history is any indication, the likelihood of a negotiated agreement is not great, as hammering out a softwood lumber agreement between the United States and Canada has typically been drawn out affairs lasting many months.
Meanwhile, the demand side of the equation remains strong with housing starts posting a modest gain in June after lackluster spring numbers. U.S. housing starts rebounded to a seasonally adjusted annual rate of 1.215 million units. Single-family starts increased 6.3% over May to 849,000 units, while multifamily starts rose 13.3% to 366,000 after five straight months of decline. Single-family permits are almost 11% higher compared to this time in 2016 so all indications are pointing to a strong second half for housing.
With regards to pricing for the second half of 2017, expect continued upward pressure on lumber commodities for the immediate future with many mills reporting order files out until late August. Many other building material manufacturers have taken increases on their products in the last ninety days so if you haven’t already seen an increase on shingles, engineered wood, composite trim and decking, exterior doors, and metal flashings, expect to soon. And then there is the old mainstays – Lots, and Labor. Builders will continue to be challenged reigning in their costs for these key components to their finished product. The positive takeaway is that builders have been successfully passing along many of these increased costs by raising the price of their homes or increasing their rents. Across the U.S., new home prices rose 5.5% in the past 12 months, according to S&P CoreLogic Case-Shiller’s July report. The median rent has grown nearly 4% compared to a year ago. We must all pray that overall economic conditions remain positive to sustain these types of increases. And while you’re at it, maybe you can also pray for a little rain in western Canada.