How Lumber Prices Hit Record Highs
The forest products industry has made headlines during the coronavirus (COVID-19) pandemic: In the spring, the pulp and paper sector was a focus during a widespread run on toilet paper, and the summer brought record-high prices for finished lumber. The week-over-week price increases for finished lumber began in May and continued into the fall.
Forest2Market’s southern yellow pine (SYP) lumber composite price for the week ending September 10 was US$928 per thousand board feet (MBF), a 61-percent increase over the previous all-time high of $576 MBF in June 2018. The North American sawmill supply chain has been impacted by pandemic-induced lockdowns that began in March. Industry capacity has been maxed, with wholesalers and distributors snatching up every board they can find.
Demand Throws a Curveball
Historically, the main driver of lumber prices has been the U.S. housing and remodeling markets, which require a well-oiled supply chain, steady import flows (primarily from Canada) and massive amounts of finished lumber, plywood, oriented strand board (OSB) and other building materials. Capacity to produce lumber is the other key pricing factor; manufacturers must be able to make and stock several products and grades to meet the demands of the huge construction market.
The record price spikes are due to three primary factors: (1) stronger-than-expected housing starts and unforeseen demand from the remodel sector, (2) capacity and supply chain adjustments and (3) market speculation driving uncertainty.
Housing starts fell 30 percent in April to a seasonally adjusted annual rate of 891,000 units before rebounding in both May and June; starts are currently at a rate of about 1.2 million units. Despite the starts volatility, demand from the remodeling sector never waned, which caught the market off guard.
An anticipated huge drop in demand was short-lived, as the remodeling sector buoyed overall demand. During the peak spring building season, Canadian lumber shipments to the U.S. were down by more than 20 percent; output from the Pacific Northwest (PNW) fell by 6 percent in the second quarter, which created an imbalance in the supply chain.
Supply Chain Still Catching Up
As production capacity has fluctuated, demand patterns have changed, and the lumber manufacturing sector has been chasing a moving target since early spring. For wholesalers and purchasers of finished lumber, who typically buy inventories weeks in advance, the result has been panic buying. Panic in commodities markets often leads to speculative buying.
This combination of events resulted in a tremendous gap in the market, and the supply chain has yet to rebalance. Five months after the lockdown peak, the finished lumber sector faces a new challenge, as production in the PNW and western Canada has been impacted by devastating wildfires that have damaged communities and timber resources.
Though order files remain full, there are signs that lumber prices may have peaked. As producers continue to react to market signals and adjust production levels, the supply/demand relationship is likely to equalize — and the North American lumber market should find its footing.
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