Record Volatility Presides Over the Lumber Market
Anyone who thought 2021 would usher in a calmer, more predictable year in the lumber industry has been sadly disappointed in the market’s performance throughout the first half of the year. After a year in which literally nothing had a hint of normalcy to it, we all craved a return to some sense of predictability, a sliver of consistency, a glimpse of stability. It never happened. At least it didn’t happen through the six months of the year – six months that were dominated by two of the largest, and most intense price swings in lumber market history. In this report we will look at the dynamics behind this record volatility. We will also interject what indicators would lead us to believe could happen over the remainder of the year, and into 2022.
First, let’s recap 2020 for context. Without rehashing too many (painful) details, 2020 was simply a gut-punch of a year. The whole world was turned upside down, and in many ways, we are still trying to gain our footing. The only certainty – was uncertainty. The worldwide pandemic, better known as COVID-19, rocked our world and put everyone on their heels. The lumber industry, like many industries, is still trying to navigate the choppy waters left in its wake. In an industry that operates within a relatively narrow range of parameters, literally no one was prepared for the frenzied and unbalanced events that transpired in 2020. In a nutshell, after the announcement of the COVID shutdown, the lumber market crashed, then, the lumber market unexpectedly surged, then it crashed again, and finally, the lumber market surged – to record heights.
Enter 2021. The final surge, beginning in late November, started a 26-week rally in the market (except for two weeks in January) that culminated in wood prices being traded at levels no one ever thought possible through much of the first half of this year. The best image I can offer you is a quick look at Contract Lumber’s Commodity Price Index Chart. It is a tool that we use to track the mill costs of key commodities, captured from Random Length’s Reporting Service. The chart is tracking the weighted average cost of items that represent roughly 85% of the cost for an average rough framing lumber package. The chart is a tool that helps us follow the percentage of increase and decrease over time. But in this case, it is an impressive visual of just how extraordinary the last seventeen months have been in our industry.
CL Index Average By Year
Of course, the proof is always in the numbers. The table below helps illustrate the financial toll behind the graph’s data. Listed below is the yearly average of our index since 2017. As you can see, 2020 was over 70% higher than the average in 2019. Then, through the first six months of 2021, the index’s average skyrocketed by over 108% above the 2020 average. And while we are starting to see significant relief in the market, the average for the year will likely settle out anywhere from 25-35% higher than last year’s all-time record. The markets high point came in late May when our index topped $1,475. Again, for perspective, our index’s previous record high prior to the COVID-run was $538, back in June 2018. That is an increase of over 174% above the previous record high. Several individual products had even greater percentages of increase. OSB, for instance, had astronomical gains, with 7/16” sheathing topping $1,345 MSF ($42/sheet) at the mill and 3/4” T&G rising to $1,810 MSF ($56.50/sheet). That is a whopping 498% and 396% increase from April 2020 pricing levels, respectively. Plus, these were published prices. There were reports of buyers paying premiums of hundreds of dollars per thousand over print in order to get in line for product that they were desperate for, even though delivery was often months out. The market was turbulent. There was a sense of desperation on the part of lumber buyers that dominated their every working hour, and beyond. Of course, that same helplessness transferred over to the building community. It was commonplace to be told by your supply partners that we don’t have the product and aren’t sure when we will. Builders grew frustrated, especially when a growing number of trades and suppliers were coming to them with similar narratives. It was as discouraging a time as I can ever recall in my three-plus decade career. No one seemed happy in the midst of being so busy.
At the same time, short-staffed lumberyard and construction field operation crews were being taxed. The backlog of homes to be built grew, as builder sales easily surpassed monthly quotas. Shipments to jobsites were disrupted by holes in inventories. Crews could not start homes because of a lack of critical materials, or even worse, they had to pull-off sites when backordered materials interrupted their progress. The whole process became very disjointed and fraught with uncertainty. Relationships were tested. An industry that prides (and measures) itself on promises fulfilled, grew helpless and handcuffed. People who always seemed to be in total command, became awkward and clumsy. And while much was still accomplished, nothing came easy.
Now for the good news! One thing a 30-year career affords you in this business is that you know change is always on the horizon, sometimes, practically overnight. At least that’s the way it seemed regarding lumber mill order files in mid-May. Everyone knew that eventually the ballooning lumber market would burst. How quickly it turned around, and its intensity, left many in awe, especially considering the steady demand from homebuilders. The market’s rocky slope upward became a cliff on the backside. The ascension took six months. The correction (which is still in play), took less than half that. Of course, the move downward has been disjointed. It started with the dimension lumber market but has finally spread over to OSB. Solid sawn wood came off in chunks. Order files dried up, seemingly overnight, and lumber offerings from the mills became available. Most purchasers of lumber have seen falling markets before and they are very adept at scurrying to the sidelines to become spectators when the tide turns. That’s particularly true when so many dealers still had high-priced wood coming at them at various points in the pipeline. The downside risk was immense.
So that’s where we are today – a lumber market that has gone from being underproduced, to suddenly having ample supply. Mills are searching for levels that will coax buyers back into the market, but they have generally been unsuccessful at getting them to bite on much more than fill-in quantities in this falling market. Therefore, current reported price levels have had minimal impact on real-time prices at the dealer level. They are still concentrating on working down elevated inventory positions. Only within the last few weeks has trading activity picked up as we approach more historical price levels. Last week, reports circulated of an increase in the number of volume purchases in the OSB market, extending order files and causing an uptick in panel prices. The trending is positive, and it is just a matter of time for this lower-cost wood to filter into the marketplace. Relief from record-high lumber prices is on the horizon.
There is a caveat to the level of the relief some builders will see. Over the past decade-plus, many builders have switched to Engineered Wood Products (EWP) for the framing components of their homes. These include I-Joist, Laminated Veneer Lumber (LVL), and Glulam Beams. In competition with OSB for the most under-supplied material over the past six months, has been EWP. With fewer manufacturers than solid sawn lumber, EWP producers have been unable to keep up with demand for their products. Prices for this product have skyrocketed, but even more painful has been the industries almost unanimous move to selling on allocation. Dealer’s EWP volumes have been slashed and it has created a production nightmare for them, and their customers. And unlike its solid sawn counterpart, no relief is expected on the 50% price hike most of the industry has taken over the last 8 months. In fact, some builders looking to keep their projects moving, decided to move back to solid sawn lumber joist over the past few months. This allowed wide-width spruce and pine to hold on to their elevated pricing longer due to a surge in trading activity from builders subbing out tardy EWP.
Detailing what has happened in the lumber market over the past year is relatively straightforward – painful, but uncomplicated. Examining the why behind the largest surge and fall in lumber market history is a little more convoluted. You can simply pawn it off to supply and demand, and certainly, in the end, that is the simplified version of what has taken place. However, there are complex variables on both the supply side and demand side. Let’s examine a few.
Lumber Demand
The most common indicator used to gauge lumber demand is national housing start data. If you examine lumber start data from 2000 on, it chronicles the amazing perseverance of the housing sector. From 2000 until 2006, the U.S. averaged over 1.7 million (Seasonally Adjusted Annual Rate – SAAR) housing starts a year topping out at over 2.2 million units in January 2006. It was the housing boom and construction was thriving, only surpassed by a surge in 1972. Then, the bubble burst and the Great Recession was upon us. Over the next 40 months, housing tanked, culminating in housing starts bottoming out at 478,000 units (SAAR) in April 2009. Since that time the housing market has been in recovery mode, but it has been a long, slow slog. Over the next 5 years, housing starts averaged 707,000 units. The next 5 years grew to over a million starts per year. Then in August of 2019, it appeared the U.S. was poised to finally shed the “in recovery” label – we had recovered. Starting with the September ’19 starts, we averaged 1.455 million housing starts over the next 6 months, through what would have typically been a slower time of the year. The data was telling us that the U.S. housing market had regained its luster. That’s when the pandemic hit.
After the announced shutdown, an immediate feeling of uncertainty crept into the American psyche. One thing seemed certain – people weren’t going to be rushing out and buying new homes. At first, numbers bore that out with housing starts tumbling 41% over the next two months. But then, the unexpected happened. People did buy homes. They also built decks, and patios, and fences. They decided this was the perfect time to add on to their existing home since they were spending so much time there. The remodel and repair market surged to unfathomable levels. Every big box store was under siege and every R&R contractor was covered-up. Demand for wood products went through the roof and producers were not prepared. (more on that under the lumber supply heading)
The remainder of 2020 saw housing starts average 1.416 million units (SAAR) and so far this year, the U.S. has averaged 1.583 million units, even as housing affordability edges upward and supply chain shortages challenge builder productivity. The lumber-intensive single-family housing market has finally hit its stride topping 1,000 units (SAAR) in each of the last 11 months. Prior to eclipsing the million-unit mark in December 2019, single-family housing starts had not reached that mark in nearly 15 years. The housing market continues to pick up steam and get back to the growth trajectory that was forecast before the pandemic hit. Demand for lumber grew an impressive 8% in 2020 to 52.6 billion board feet (BBF), the highest level since 2007, which is remarkable considering the unprecedented disruptions of the US economy cause by COVID. Expectations are for lumber demand to advance another 5% in 2021.
Consumption of softwood lumber in new residential construction remains exceptionally strong and a bright spot for the US economy. Lumber demand for this construction sector will accelerate another 11% to reach 18.5 BBF in 2021, after posting a 9% jump last year. The Repair and remodeling sector (R&R) remains the largest end-use market for softwood lumber, accounting for over 44% of total softwood usage. The unexpected surge in R&R lumber consumption last year was undoubtedly the key contributing factor in the lumber price spike and material shortages. Expectations are for this sector to stay strong for years to come given the rising age of the housing stock, low housing inventory, soaring home equity, and the rising trend of working from home.
Lumber Supply
Hull Oaks Lumber Company, Monroe, OR
The pandemic created the perfect storm of supply chain difficulties. Even before COVID hit, North American lumber producers entered 2020 with 300 million board feet less capacity after an unprecedented wave of mill closures in 2019. The shuttered production was concentrated in the British Columbia Interior, although there were cuts in the Pacific Northwest as well. It was an unexpected surge in housing starts over a 5-month span from October 2019 thru February 2020, that put a strain on lumber supplies at a time when mills and the distribution chain would have normally been building supply for the upcoming building season. Instead, lumber was flowing to jobsites at an unusual pace and a mild winter allowed construction to continue unimpeded. Producers were straining to keep pace and lumber prices jumped 25% during that time. That’s when the nationwide lockdown was announced due to the onset of the Coronavirus. With their inventories already depleted, most lumber and building material manufacturers halted production. The prospects of selling lumber for new homes or R&R projects, seemed remote. Of course, in reality the lockdown was relatively short lived, at least for the construction industry. Deemed an essential business in many states, construction slowly ramped back up as did the building material supply network. While jobsite activity was able to rebound without major productivity hurdles, manufacturing was not as fortunate. Production capacity shrunk at mills and factories as new safety protocols were enforced. Staffing became a nightmare and in the worst-case scenarios, a COVID outbreak among factory workers forced cuts in production or even shut down plants completely, creating even longer delays. Conservatively, the virus reduced lumber operating capacity throughout the industry by 8-10% in 2020 according to data compiled by the Bureau of Labor Statistics looking at hours worked at sawmills.
The first signs of material scarcity appeared in late April 2020. Treated lumber, southern pine dimensional, decking, and fencing were some of the first items that became hard to source. It was also an indication of the role the R&R and DIY sector would play in the looming lumber price spike. Momentum quickly built and the market ran hard into early September. While there was certainly a hint of material shortages during the summer of 2020, for the most part widespread delays did not emerge. The price was hard to digest but keeping customers in wood and projects moving forward was everyone’s objective.
Few were surprised when both the framing lumber and structural panels markets came off in late September 2020. Our index, which had reached an all-time high of $908 on 9/11, tumbled until Thanksgiving, giving back over half of the gains from the previous 22-week run. Everyone was thinking we finally were getting some relief and producers were getting in front of their supply-driven challenges. That was obviously not the case. The market turned abruptly, and lumber posted gains in 24 of the next 26 weekly reporting periods, which I have already chronicled earlier in this article.
The tide changed twelve weeks ago. With prices bordering on the absurd, projects started to be shelved and new home buyers started to waver at new home price escalations. Mill order files quickly evaporated due to a combination of increased wood production and lumber sales to the home centers drying up. Large retailers canceled contract shipments and much of that wood was diverted to the open market. Suddenly, quick-ship wood became available and the record-level price bubble burst. But even as dimensional lumber pricing was tumbling, most dealers, many who were firmly planted on the sidelines, had plenty of high-priced wood still in the pipeline. Currently, the solid sawn lumber market as well as the OSB market shortages seem to have been generally alleviated. But price volatility will remain in the marketplace as any sense of balance between supply and demand is extremely fragile.
The Forecast
With the market approaching more historical pricing levels buying activity seems to be slowly gaining traction. Inventory levels throughout lumber’s distribution chain are thought to be low, especially given how busy pro lumber dealers are. Most analyst believe a significant round of purchasing will ensue when buyers are confident, we’ve reached the bottom of this current slide. There have been some hints of this happening the last couple weeks as spruce and pine both spent weeks flashing firming trends. Neither could produce any significant follow-through and their momentum stalled within a week. The panel market did firm up last week and mill order files were said to be building. But as more people gain confidence that these current prices represent values, especially compared to the levels we’ve seen the last 18 months, we anticipate the market to rebound at some point this fall. Hopefully we will never see a repeat of the obscene pricing levels we saw in the first two quarters of 2021, but it feels like volatility will remain with the lumber market for the foreseeable future.
There are substantial risks to both the supply and demand side equilibrium. On the supply side, the uptick in new Delta Variant Covid cases, along with the talk of re-instituting some restrictions and mandates, has anyone operating a production facility very concerned about being able to keep staffing levels up to maintain maximum output. Sawmill operations improved as COVID cases plummeted. Now that staffing levels have somewhat normalized, mills finally have been able to add shifts and overtime to ramp up production. Any threat to sawmill productivity could cause disruptions in the fragile supply balance as we head into fall and winter. Another concern impacting supply is the slowdown in rail shipments, especially out of western Canada and the Pacific NW. Wildfires are partially to blame for the slowdown but the region has had difficulties in recent years keeping up with increases in rail traffic. At least one major supplier out of the region has announced production curtailments due to logistic slowdowns. Others will most likely follow suit. Trucking has also become a logistical nightmare across much of the country as loads outnumber available trucks and drivers by a large margin.
Another lingering development has been a surprising preliminary decision by the U.S. Commerce Department to effectively double the tariffs on Canadian lumber. The duty was reduced from over 22%, down to 9% last November. The move had no real discernible impact on the price run of the past year. However, moving forward, boosting the tariff could impact any chance at stabilizing the market and has the potential to drive-up lumber and home costs heading into 2022. We desperately need to hammer out a new softwood lumber trade agreement in order to keep an interconnected supply chain open between the U.S. and Canada. Over one-third of all lumber used in construction is supplied from our neighbors to the north. Imports from central Europe increased dramatically in 2020, up over 40% above 2019 levels. Through May of this year, they had increased another 26%. Even factoring in soaring ocean freight costs and shipping delays at ports, offshore producers were happy to respond to record-breaking prices and a wood starved market. With prices in retreat, expect offshore imports to slow.
As I mentioned earlier, supply issues are hitting builders on many fronts. Some product categories with the most notable widespread shortages include appliances, plumbing and lighting fixtures, windows and doors, steel plates used in truss manufacturing, siding products, paint and paint sundries, shower doors, electrical boxes, insulation, rebar, and the list goes on. Labor shortages are also drawing out the construction process and effectively slowing down the rate of new home completions.
Of course, risks exist on the demand side as well. The top concern is housing affordability as home prices are rising at an accelerated pace. In June 2020, prices of new homes were rising at a modest annual rate of 4%. But by April 2021, prices were over 13% higher than a year earlier. That kind of escalation can send buyers to the sidelines quickly. It can also price first time home buyers completely out of the market. There does seem to be some homebuyer hesitancy developing as housing starts and permits have both been bouncing up and down the last few months. Some of the barriers include homeowners lacking the sizable down payment needed or even the ability to bring extra money to the table to cover appraisal issues at closing. Lenders are also said to be scrutinizing credit worthiness much tighter.
Another critical component that will impact the demand-side is mortgage rates. The historic low interest rates have been the catalyst (along with elevated home equity) behind this robust resurgence of the single-family housing market. While an upward trend is inevitable given these record low levels and increased inflation, the fear is that if interest rates and home prices escalate together, housing affordability will experience significant pressure. Builders are also experiencing challenges with present and future lot availability. This accelerated pace of new homes sales – often blowing away their sales quotas – has left builders selling their lot supply with little in the pipeline to replace it. Many are now limiting the pace of sales in an effort to keep a steady supply and avoid pulling in too much future demand.
To conclude, the challenging operating environment that has existing in the building and lumber industries for the past sixteen months is by no means behind us. Yes, there have been improvements. The most obvious is the sharp decrease in lumber prices. But many obstacles persist. Navigating those challenges becomes paramount. Choose your partners wisely. Remember, success is always a team effort. Things beyond anyone’s control will go sideways, and how each teammate handles this adversity affects the entire team. Patience and understanding will be critical. Also, attention to detail and heightened communication levels can reduce self-induced conflicts and delays. And most importantly – stay informed from sources that you trust!