Lumber mania: How supply constraints in B.C. are colliding with insatiable demand in the U.S. to push lumber prices through the roof

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Logs stacked at the Interfor sawmill in Grand Forks, B.C., on May 12, 2018.

DARRYL DYCK/The Canadian Press

Russ Permann has watched lumber prices soar so high that even a small pile of softwood is now viewed as a precious commodity, worthy of a punch line.

“I’m getting lumber memes in e-mails from friends and family,” said Mr. Permann, a wholesaler who is chief executive officer at Taiga Building Products Ltd. One friend messaged him a joke about a guy driving a pickup truck filled with two-by-fours in the back. The reaction of a bystander? “Look, everybody, there’s a millionaire!”

The psychology behind lumber markets has changed dramatically over the past year, catching the industry by surprise, from producers and wholesalers to retailers and home builders.

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Two-by-fours made from Western spruce, pine and fir sold this week for a record US$1,640 for 1,000 board feet, up 355 per cent over the past year, according to industry newsletter Madison’s Lumber Reporter.

Industry experts trace the unprecedented lumber rally to supply constraints in British Columbia just as demand surged in the summer of 2020. When lumber prices rose during times of tight supplies in the past, B.C. played a crucial role as a swing producer that could ramp up output. But a shortage of logs to process means that B.C. producers haven’t been able to lead the way to restore stability in the market.

“B.C. used to be an engine that you could turn up in times like this, but we don’t have that option anymore,” Mr. Permann said.

As Canada’s largest softwood lumber producer, B.C. accounted last year for 40 per cent of the country’s output.

Demand did soften during the early stages of the pandemic as consumers delayed projects around the home while housing starts also went through a lull. But then people stuck at home started a do-it-yourself bonanza in the summer of 2020, snapping up construction materials for decks and renovations. Housing starts, especially in the United States, began perking up too.

When lumber demand began jumping last July, supply couldn’t keep pace. Producers across Canada and the United States have been trying unsuccessfully to play catch-up ever since then.

The causes of today’s lumber mania have their roots in the devastating impact of mountain pine beetles from 1999 to 2005, when forests were decimated by the insects in the B.C. Interior. Researchers point to climate change because when winters were colder, the pests would be largely killed off to prevent them from becoming widespread.

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B.C. wildfires in 2017 and 2018 further depleted supplies of wood fibre.

Some of the wood fibre from beetle-damaged trees has been salvaged over the years, though lower-grade softwood ended up being shipped to China, which used the wood for applications such as concrete forming rather than house framing in construction.

The combination of the beetles and wildfires have translated into a sharp drop in the amount of timber available annually for harvest, said Susan Yurkovich, CEO of the BC Council of Forest Industries. The council’s members include Canada’s top lumber producer, West Fraser Timber Co. Ltd. , and other forestry companies.

“We can’t just immediately put on sawmill production because we don’t have the fibre to jack up our production,” Ms. Yurkovich said. “We want to harvest at a sustainable level.”

Besides the impact of beetles and wildfires in the B.C. Interior, timber harvesting has been limited in coastal regions as a result of provincial decisions to restrict land use and protect certain forested areas. In addition, industry experts forecast a coming reduction in cutting on Crown land, in a bid by the provincial government to create a sustainable harvest.

Crown timber accounts for 95 per cent of British Columbia’s forested lands. The B.C. government controls the amount of trees that producers chop down on that land, in what’s called the annual allowable cut. The goal is to ensure a supply of timber for generations to come, though environmentalists are advocating for more stringent controls. It takes 70 to 100 years in the B.C. Interior before spruce, pine and fir trees are considered ripe for harvesting.

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Industry experts forecast that total B.C. tree harvesting, including regions regulated by the annual allowable cut that account for 90 per cent of the total volume, will decline in the years ahead.

Ric Slaco, who retired in February as chief forester at Burnaby, B.C.-based Interfor Corp. , said that after witnessing many commodity cycles during more than 41 years in the forestry sector, even he is shocked by today’s imbalance between demand and supply.

“There’s only a certain amount of timber that’s available out there,” Mr. Slaco said. “To ramp up production is not as simple as just adding more trees. Well, where are the trees going to come from? Remember that you’re operating on a model of sustainability. You’re cutting the trees on the basis that there’s a sustainable harvest.”

This structural change in timber supplies will have long-lasting impacts. Tree harvesting in the province peaked at nearly 90 million cubic metres in 1987, according to statistics compiled by the B.C. government. From 2006 to 2015, it fell to an average of 74 million cubic metres a year, and has dropped sharply in recent years. The province’s timber supply, from both public and private land, is on a trend line to be less than 58 million cubic metres annually.

But even the current shortage is causing problems. “Demand has been off the charts, right? It has been very high demand with supply disruptions. You put those two things together and this is a classic case of supply and demand,” Ms. Yurkovich said. “We can’t just build 10 more sawmills to meet the demand in the U.S. market.”

In fact, an array of B.C. producers shut down sawmills or scaled back production in 2019, citing low lumber prices and reduced log supplies.

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Canfor Corp., for example, closed its sawmill in Vavenby in the B.C. Interior. Other producers that closed B.C. mills two years ago include West Fraser in Chasm, Tolko Industries Ltd. in Quesnel and Conifex Timber Inc. in Fort St. James — part of a series of downsizing measures in the industry over the past decade.

Canada’s forestry sector has spilled red ink during tough times, especially in dwindling product lines such as newsprint. But many companies have diversified geographically, and are now getting a major lift from lumber as the star attraction. With the industry much leaner than before, the impact can be seen in the latest financial results.

Vancouver-based West Fraser posted a first-quarter profit of US$665-million, compared with a gain of US$9-million in the same period of 2020. Canfor, also based in Vancouver, roared to a first-quarter profit of $428-million, compared with a $70-million loss a year earlier.

Sawmills are now thriving because they’re able to sell lumber at high prices while costs remain under control. The share prices of both West Fraser and Canfor hit record highs on May 10, though a sell-off since then shows nervousness among investors on the possibility that the lumber sector has peaked.

Still, investors who piled into forestry names when share prices dropped in March, 2020, have made large gains. And long-time shareholders are glad that they held on for the rollercoaster ride.

Wholesalers and retailers are also prospering, though not nearly as much as producers operating sawmills because profit margins are currently thinner further along the supply chain at the wholesale and retail level.

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“So many people are building and renovating,” said Liz Kovach, president of the Western Retail Lumber Association. The association’s members include retailers under banners such as Home Hardware, Lowe’s, Rona and Timber Mart.

Logistics bottlenecks have been delaying deliveries of certain types and sizes of lumber, as well as having a ripple effect on other construction materials. Customers who have tried to order specialty items in May found themselves on a waiting list into June at some stores. “The pandemic has had a cascade of events and created a huge disruption,” Ms. Kovach said. “It shows how the volume of lumber that’s produced from B.C. silviculture is so important to the economy.”

Consumers and home builders are footing the final bill. The National Association of Home Builders in the U.S. estimates that lumber supplies now cost US$53,000 in the construction of a new American single-family home, tripling over the past year.

In the U.S. South, the growing season is much faster, but it still takes about 35 years before southern yellow pine trees are harvested. Furthermore, lumber from B.C. is widely viewed as more desirable for wood framing in residential construction because the growth rings are tighter and tend to result in a better quality two-by-four or two-by-six for home builders, compared with southern yellow pine.

Two-by-fours made from southern yellow pine went for US$1,390 for 1,000 board feet this week, selling at a discount compared with Western spruce, pine and fir, said Keta Kosman, publisher of Vancouver-based Madison’s Lumber Reporter.

To arrive at its weekly survey of prices, staff at Madison’s contact industry sources such as lumber producers, wholesalers and distributors. “The price of all other building materials is up as well, not just lumber. Plumbing, cabinets, fixtures, tiles,” Ms. Kosman said.

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Other items related to home repair and remodelling that have experienced a boom include windows, doors, flooring and an engineered panel product called oriented strand board.

It remains to be seen how long the brisk business from do-it-yourself projects and home contractors will last. “It is unclear how extensively last year’s surge in home improvement projects may have borrowed from demand going forward,” Random Lengths, an Oregon-based company that surveys wood prices, said in a newsletter.

While trees ready for harvesting are relatively plentiful in the U.S. South compared with B.C., gaining access to wood fibre or having the capacity to process logs remains challenging. Wildfires in the U.S. Pacific Northwest and California devastated forests last year. In addition, there are constraints because producers have been slow in expanding or building new sawmills, which require a steady source of timber to process to be profitable over the long term.

West Fraser and Interfor recently announced investments in the U.S. South.

West Fraser has budgeted US$150-million to expand its lumber operations at five sites in the U.S. South, including increasing production of two-by-fours. Interfor is spending US$30-million to expand a sawmill in Georgia.

B.C. is Canada’s leading exporter into the United States, accounting last year for 43 per cent of total shipments south of the border by volume.

Canadian producers also have been paying U.S. duties on lumber shipments south of the border since April, 2017.

Those duties are supported by the powerful U.S. Lumber Coalition, which represents American producers and private woodland owners. The coalition argues that stumpage rates levied by provinces against companies that chop down trees on Crown land are too low. But the National Association of Home Builders has been leading a campaign to lobby for a new Canada-U.S. softwood agreement.

Even with increased production in the U.S. South, the United States as a whole is able to meet only 70 per cent of its domestic demand. Canada provides most of the balance of lumber supplies sought by the United States.

Industry observers believe that even if lumber markets drop in the weeks and months ahead, it’s unlikely that commodity prices will plummet to less than US$400 for 1,000 board feet a year ago. A new floor price for lumber could be established for years, though it’s unclear whether that might be US$600 or US$800.

Back at Taiga Building Products, Mr. Permann is amazed to see what economists call price inelasticity in lumber – price increases haven’t dampened demand, at least not yet.

“How many products can go up three to four times in price and people are still willing to pay it? Lumber demand just seems to be insatiable,” he said. “You just can’t seem to fill it, that’s for sure.”

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