Date August 2018
approximate net recovery on cost
- A 20% tariff was imposed on imported Canadian lumber in November 2017
- In Q1 2018, the U.S. imported 3.07 billion board feet of Canadian lumber, down 15 percent from 3.63 billion board feet in 2017, according to data from Forest Economic Advisors
- Canadian lumber imports in Q1 were equivalent to 36 percent of domestic lumber production, down from 42 percent in all of 2017, and have slipped a further 6% through the first half of 2018
- The 2018 framing lumber market has already established itself as one of the most volatile in history
Housing starts mixed: Domestic housing starts are noteworthy when monitoring the health of the construction industry and the demand for dimensional lumber. For May 2018, new, privately-owned housing starts in the U.S. were at a seasonally adjusted annual rate of 1,337,000 units. This represented a 19.2 percent increase over the May 2017 rate. However, starts for June 2018 took a dive, coming in 12.3 lower than May, and 4.2 percent lower than June 2017. Despite the decline for June, on a year-to-date basis, starts are up 7.4 percent for 2018, indicating continuing strength in the housing market. Home size and alternative building materials such as steel studs could overstate the implied demand created by the U.S. Census Bureau and the Department of Housing and Urban Development official housing start numbers, but the numbers are still seen as favorable.
Lumber pricing volatile: As of July 27, 2018, Random Lengths’ framing lumber prices had been declining since reaching record highs in early June. However, the level of discounts accelerated in late June as mill inventories increased. The price drop for the last week of July registered its seventh straight weekly decline and the largest since 2004. With orders being non-existent at many mills, Random Lengths noted that “producers aggressively reached out to their customers in search of price levels that would book orders.” Adding, “The overall trading pace improved slightly from recent weeks, but was far from enough to stem the bleeding.”
Lenders should keep in mind that while industry publications can provide regional market trends, actual printed prices are not necessarily representative of transactional activity. Prices generally represent full truckload quantities with FOB mill freight terms. Long-term supplier relationships, volume discounts and freight logistics can impact the actual gross recoveries in the event of an orderly liquidation.
Tariffs drive increases in import prices: Canadian lumber imports are currently the largest supplier to the annual U.S. softwood lumber market, accounting for about 28 per cent of U.S. sales per year over the past decade per information from the Congressional Research Service published in April 2018. In June 2018, the National Association of Home Builders (NAHB) met with the U.S. Commerce Secretary to discuss the issue of the 20 percent tariff, which took effect in late 2017, and its effect on imports of Canadian lumber. The NAHB noted that the discussion included their “mutual concern that lumber prices have risen sharply higher than the tariff rate would indicate, and that this is hurting housing affordability in markets across the nation. Rising lumber prices have increased the price of an average single-family home by nearly $9,000 and added more than $3,000 to the price of the average multifamily unit.”
The association added that “it is essential that the two sides resume talks and hammer out a long-term solution to this trade dispute that will ensure U.S. home builders have access to a stable supply of lumber at reasonable prices to keep housing affordable.” After hitting highs in early June, pricing decreased over the course of July, indicating ongoing instability in the market.
Geography may limit marketability: Generally, lumber distribution can be regional due to freight logistics and cost. Given robust mill activity in the Southeast, a wood products inventory located in the Pacific Northwest would not necessarily be an attractive buy for a potential customer in Georgia. Therefore, the liquidation footprint would likely remain within the traditional geographic area of the mill or of the wholesaler’s existing customer base. Additionally, regional building practices, builder preferences and/or codes may limit the marketability of some materials. Assuming dimensional lumber milled in Canada for export to the U.S., tariffs and currency exchange fluctuations can also impact gross recoveries.
Green lumber may have lower recoveries: Special consideration should be given to “green” and undressed kiln-dried lumber. Cut-to-length and/or tree length logs are optimized to yield the longest length possible of specific dimensions (e.g., 2x4, 2x6, 2x8, etc.) The cut lumber exits the sawing operations green and will require drying to reduce moisture content. Once dried, the lumber is usually dressed and graded. Sold “as is, where is,” the market for green lumber is generally limited to other operations with kiln and dressing capabilities. Undressed kiln dried lumber would also have limited marketability and would likely be sold to buyers with dressing capabilities. If the subject inventory is located in a region with several local mills, the demand for green and/or undressed lumber would be greater than a remote mill. Also, if regional mill activity is declining, the local “appetitive” for green and/or undressed kiln dried lumber may be depressed. Again, freight logistics and cost will impact the price potential buyers are willing to pay for this inventory.