Before the baby food shortages, skyrocketing gas prices, and low inventories of new and used vehicles — the issue of the day was high lumber prices.
No doubt, lumber prices have been at record levels the past couple years, but, for lumber buyers, some relief is on the way. Like many commodity industries, lumber markets experienced the “perfect” (or worse?) storm of demand/supply and its certainly not a question of “gouging”. How did we get here and what can we expect in the future?
How did we get here?
First, on the supply side, lumber mills anticipated a sharp drop in demand at the onset of COVID, so they drew down inventories. Production has since ramped back up but for quite some time mills faced production pinch-points due to social distancing, they’re finding it increasingly difficult to hire new workers at the mills, and truck drivers are in short supply.
Meanwhile, fiber supply has been affected by Mountain Pine beetles in British Colombia –destroying fifteen years of log supply there — wildfires in the Pacific Northwest have devastated log supply in some counties in Oregon and destroyed many mills, and flooding in British Colombia derailed supply in that region.
On the demand side, lumber demand soared in both housing construction (aided by historically low interest rates) as well as for repair and remodeling – think about outdoor decks, landscaping surrounding pools, etc. — unexpectedly jumped 20% during the pandemic.
In response, the industry has been ramping-up production as fast as possible. Sawmillers have invested a significant amount of money trying to keep up with growing demand. On top of $ billions invested in expanding capacity over the past five years in the U.S. South.
Moreover, they’re adding shifts and running their mills to the fullest extent possible while still maintaining their workers safety given COVID-19 concerns.
Importantly, adding production capacity is no easy task. A modern-day pine lumber mill costs some $250 million to build and, with permitting, environmental impact assessments, road/bridge capacity weight limits peripheral to the planned mills, etc., it easily takes two years to build a “green field” mill – and by that time the record high prices would be no longer.
Looking forward
For lumber buyers some relief is on the way. Prices are trending down as mills replenish inventories and shipping logistics is beginning to loosen.
Mostly, though, is that the industry is bracing itself for what could be a sharp drop in demand over the coming year — new home sales in April of this year have declined by nearly 27% compared to April 2021, on a seasonal adjusted basis, driven by rising interest rates, construction labor shortages, and rising house prices. Lumber futures are falling to levels not seen in nearly a year, and the decline is expected to continue.