Russ Taylor, President Russ Taylor Global, Vancouver/CA; www.russtaylorglobal.com
The good news is that the Fed’s first prime rate reduction is expected to occur in mid-September, with the possibility of two more reductions by the end of the year. This should start a steady reduction in interest rates for home buyers and renovators for the rest of this year with more relief to follow in 2025. US mortgage rates have moved from a peak of 7.9% in late October 2023 to a more recent high in May of 7.3% to only 6.45% in late August 2024. It has been suggested that when mortgage rates get into the 5.5% range, it will be a very positive stimulus for home buyers. This suggests that if the US Fed could reduce its prime rate by 1% - perhaps by early 2025, then this would be the catalyst needed to jumpstart the US market.
Since June, the Bank of Canada has implemented three 25 basis point reductions in its prime interest rate, and more are expected in 2024. This will be good news for the lumber and panel industry that has been waiting for rising lumber demand, especially as new residential construction and repair/remodelling account for 75% of US lumber consumption and even more in Canada. However, Canadian mills are now facing a 14.54% US import duty, up from 8.05% for the previous 12 months.
Most US lumber prices bottomed out in July when they became very depressed from declining demand and over-production, with prices being well below sawmill costs. For W-SPF 2x4 #2&Better, lumber prices bottomed out on July 12 at US$325/Mbf (FOB BC mill) and had jumped to US$392/Mbf (US$253/m3) in early September. Southern Yellow Pine (West) first bottomed out in late April/early May at US$285/Mbf (FOB mill) and then a second bottom at US$301/Mbf (US$194/m3) in early July, but had increased to US$334/Mbf (U$216/m3) by early September. In both cases, these current prices are still near or below the better sawmills’ break-even prices.
As a result of these lower prices, total US offshore imports (July year to date) are lower by 11% (after falling 7% in 2023). Volumes from Germany and Sweden (the top two US offshore suppliers) are down by 19% and 10%, respectively. Smaller exporters include Romania - down 65% - but Austria is up by 27%.
The losses at North American sawmills since the start of second quarter indicate why curtailments have been occurring through out the West and in the US South. Permanent mill closures in 2024 at high-cost mills have also been announced in BC (4 sawmills), the US PNW region (6 mills) and the US South (7 mills).
Four of the largest North America lumber producers alone have announced about 1 billion bf of curtailments through third quarter and fourth quarter. This represents an annualized production volume decrease of about 6% of North American lumber production. If other company curtailments are included, the total gets closer to a decrease of 10%. These North American sawmill curtailments (and reduced European exports to the US) are all part of the solution to get lumber prices moving upward again and this should start to kick start lumber prices higher. From the lower US interest rates coming soon and so much production curtailments, I expect lumber demand to rebound against a smaller supply base. I predict W-SPF lumber prices to spike higher to well over US$500/Mbf (US$323/m3) and US east coast lumber prices to move to well over US$600/Mbf (US$388/m3) in the next six months – allowing for increased European exports to the US. The question is: will the increase be sustainable, or will it crumble? The US and global sawnwood market dynamics and price outlooks will be a big part of the discussions at the Global Wood Summit in Vancouver (October 29-30).
Russ Taylor, President
RUSS TAYLOR GLOBAL
