North America Softwood Lumber Market Year-End Update: 2022

SEATTLE (Scrap Monster): As the forest products industry matures into this post-Covid landscape, and the new realities of macroeconomic conditions become more clear, a better picture of cyclical lumber price trends is forming. In the past, solid wood manufacturers were able to rely on a relatively stable seasonal cycle; the beginning of slowdown after Labour Day, with lumber prices dropping until the end of the year. Then more buying in advance of the spring construction season, which brought higher prices usually by February.

For the past couple of years that historical annual cycle did not come into play. If the dramatic price increases seen since early 2020 had happened incrementally over the previous decade — for example, up 10% or 15% per year — no one would have thought it unusual. Those price rises were so sharp and happened so suddenly, some people thought that levels must come back down.

Now there appears to be a return of seasonal stability in home buying, in new housing construction, and thus for lumber demand as well.  However, there are quite a few changes in comparison to the past. The most important for sawmills is that a new floor for dimension lumber prices has been established.

The main reason for this is because the cost structure for producers has changed completely. Not just general inflation, but more fundamental – structural – changes to the forest industry and sawmilling which have increased operating costs significantly.

Understanding of these new realities has emerged, and the forest products industry is looking forward to 2023 as players are wondering what to expect. Opinions range widely about forecasts for price points, but there is general agreement about one thing; the wild volatility of the past two years is behind us. So where are future price swings likely to land?

To Madison's it seems that Western Spruce-Pine-Fir 2x4 #2&Btr KD (RL) will fluctuate somewhere between US$500 and $700 mfbm. This is because that lower price is very generally the new cost-of-production for most large-volume operators in British Columbia. It is also because industry has become much more savvy since the early-2000s, in terms of responding quickly to market conditions by curtailing production and taking downtime.

The habit in the past of continuing to produce lumber despite big drops in demand, thus keeping supply high and driving prices down, is no longer the usual method of operating. Since the beginning of 2021, facilities across North America have noted dropping demand and have responded by reducing production volumes.

The importance of US housing starts – especially single-family starts – to sawmills cannot be overstated: fully 65% of Canadian softwood lumber sales go to the US, largely for new home building, 10% is sold within Canada, and 6% goes to Japan. Japan lumber purchases are entirely #1/Appearance Grade, or Premium wood, not the standard grade, or #2&Btr, used in North America.

October starts of single-family housing, the largest share of the market and construction method which uses the most wood, were down by -6.1% to a rate of 855,000 units. Single-family authorizations were at 839,000 units, which is -3.6% below the September figure of 870,000 units. Building permits are generally submitted two months before the home building is begun, so this data is as indicator of December construction activity.

Courtesy: www.newswire.ca