Lumber Future prices for March 2022 (a loose guide to price directions) have been fluctuating wildly and touched over US$1,300/Mbf (FOB BC Mill) last week but are now drifting lower towards cash prices. More spectacularly, Southern Yellow Pine (SYP) 2x4 lumber prices have already eclipsed their 2021 high and were trading this week at US$1,491/Mbf (US South-west, FOB Mill), or €845/m3. An FOB mill normal price spread between SYP and W-SPF lumber is around US$50-80/Mbf (€37/m3). The current spread of US$271/Mbf (€154/m3) is huge and indicates that there could be substantially more upward movement in SPF prices to narrow the price gap with SYP lumber (or, alternatively, a downward correction in SYP prices).
Clearly, there continue to be on-going events that are creating more volatile markets, as they did in 2021. It is much the same story, however, as transportation disruptions, severe weather changes, and COVID-19 are all key factors that continue to negatively impact supply chains in North America and around the world. With reductions in workforces through the production, logistic and distribution channels, inconsistent production coupled with late shipments and poor logistics are motivating buyers to increase orders, in some cases no matter what the price, so that they have enough stock for customers.
Other new factors include the December 2021 increase in the US import duty on Canadian lumber shipments – this increased from 9% to 17.91% from the mandatory annual review conducted by US Department of Commerce. This has caused more outrage by various consumer and industry associations, as already tight lumber availability from Canada coupled with higher prices are simply being passed on to consumers. This has a knock-on effect with builders and is also contributing to record levels of inflation in the US.
British Columbia has seen it fair share of wood products production and logistic disruptions since mid-November and more impacts to output are coming. First there were a series of “atmospheric rivers” – or intense wind and rainstorms – that hit parts of southern BC causing massive washouts of bridges and roads as well as severe flooding from rivers spilling their banks. This event shook US lumber markets and essentially kick-started the current lumber price rally.
Further reductions in the lumber supply BC could start to show up in first quarter from new provincial government policies being proposed that will reduce the timber harvest in BC. The government rammed through multiple reforms in the fall legislative sitting that will create permanent reductions in the timber supply. This includes a 7% reduction from old-growth forest set asides, transfers of forest tenures from companies to First Nations, and possibly to secondary wood manufacturers. As part of the old-growth timber deferral process, harvesting is being temporary halted by the government agency (BC Timber Sales) representing 20% of BC’s harvest and licensees may not be able to log on any old-growth stands in their forest licenses, including those that have existing permits. This will particularly impact the western red cedar business - both sawmills and secondary processors. In combination with caribou habitat protection, somewhere between 1 and 2 billion board feet (1.6 to 3.2 million m3) of production will be lost by 2030 from these new policies alone, and much of it sooner than this.
Why are European lumber exports to the US so important?
Simply put, the US and Canada cannot meet the net lumber demand required by the US in the short-term, so European imports are required. In analyzing the North America lumber market for the first 10 months of the year and extrapolating to the end of 2021, the sources of incremental volumes for the year in comparison to 2020 tell a critical story. Incremental volumes in 2021 from Europe will provide the second largest increase in US lumber supplies with a net increase of about 400 million bf (620,000 m3)! The largest incremental volume was from Canada, led by BC (almost 1 billion bf, or 1.55 million m3). Despite the huge sawmill capacity increases in the US South, incremental volumes from there will amount to just 330 million bf (510,000 m3) in 2021, followed by the rest of the US regions at 240 million bf (370,000 m3).
Of the incremental lumber volume required to meet US consumption (plus increased US exports), a total of 2 billion bf (3.1 million m3) of addition volume is required in 2021. Europe imports will represent about 20% of this incremental volume in 2021 and a similar increase in volume (or more) will be required for 2022 for the US to meet total demand. While the largest incremental supplier to the US in 2021 was Canada, any increase in production and export volumes will be much lower in 2022, especially from the pending timber supply reductions that are already impacting BC. BC provided the largest incremental volumes to the US in 2021 – over 900 million bf ( 1.4 million m3) and almost 95% of Canada’s volume increase – but only small increases are expected from BC in 2022. This will require Europe to potentially provide even higher incremental lumber volumes to the US in 2022 to meet the expected US demand! This could be quite a challenge, but also a terrific opportunity for European lumber exporters.