Russel Taylor
Most, if not all, of the demand fundamentals seem to be positive, with only a few minor items (like rising interest rates and building material shortages) appearing that could potentially slow this amazing pace of lumber consumption. Essentially, with sawmills running flat out to produce as much lumber as they can, demand is still way ahead with the potential product shortages still emerging here and there. All these dynamics have caused lumber prices to remain at or near record levels. In short, it is a stunning market development that nobody could have forecast, and the way forward is also something that cannot be forecast with any degree of accuracy. Essentially, we are in unchartered waters – this makes the market thrilling but also dangerous for both buyers and sellers.
The lure of strong prices continues to see increased European lumber exports to the US market: in 2020, Europe represented 9.1% of total US imports (3.3 million m3); and in the first two months of 2021 it is slightly lower at 8.5%. This compares to only a 1.4% share of US imports in 2016 (0.5 million m3).
The bellwether W-SPF 2x4 #2&Better R/L (FOB BC mill) price continues its unprecedented surge: after plateauing for four weeks in March at a record US$1,025/Mbf (€555/m3), it has continued to advance and is currently at a stunning US$1,170/Mbf (€635/m3) on April 14. This translates into an east coast price of about €700/m3 and something close to about €650/m3 ex-German sawmill. Absolutely phenomenal prices for SPF structural lumber!
With W-SPF representing 21% and SYP about 35% of North American lumber production, the short-term trend in lumber prices could be tied to what happens to the trends in both products. Historically, there has been a US$60-70/Mbf (€35/m3) higher FOB mill price for southern yellow pine (SYP) lumber as compared to W-SPF – most of this difference is accounted for by the freight cost to transport W-SPF lumber to the US South (about US$110-120/Mbf; €62/m3), with difference then eroded for a market premium for SPF over SYP in the market. What makes things complicated is that SYP-West lumber (FOB mill) is currently selling at US$1,044/Mbf (€567/m3) which is a discount (US$126/Mbf; €68/m3) to W-SPF (FOB BC mill) and not a premium. While there are recent reports of SYP lumber prices starting to rally again, the big question is whether SYP prices will rise or whether W-SPF prices will drop to allow for a more traditional price gap between the two products? Or will it be a combination of both?
In either case, it still raises the even bigger question: “How much longer can these record-level prices say elevated?” Inevitably, prices will move lower and then could cycle back higher again to regain some of the losses, but ultimately (perhaps by 2021-Q4) prices could be (should be?) some 30-50% lower – but still at levels that will be around double the 18-year average FOB mill price on W-SPF of US$355/Mbf (€193/m3)!
As earnings at US and Canadian sawmills creep ever higher – expected to be close to an average of 45% EBIDTA (earnings before depreciation, taxes and amortization) in 2021-Q1 – the next question is: “What are these companies going to do with all of the cash they are generating?” And will we see any further mill acquisitions in Europe by North American companies, as even vice-versa? Lots of moving parts , dynamics and uncertainty as we move forward in 2021-Q2.
Russ Taylor, President, RUSS TAYLOR GLOBAL, Vancouver BC Canada www.russtaylorglobal.com
