Lumber Market Trends
COVID-19 INDUSTRY BRIEF
EFFECTS OF THE CORONAVIRUS ON THE Lumber INDUSTRY Updated August 27, 2020
- General Market Conditions: The market is benefiting from three key trends at this time: (1) the pandemic is improving the demand for single-family residential construction as homeowners consider a transition to less densely populated geographies; (2) with homeowners spending more time at home, repair and remodel spending continues to strengthen as homeowners invest in existing homes; (3) housing supply has fallen due to the lingering impact of the Great Recession as well as demographic changes.
- COVID-19 Impacts: Although deemed essential in both the U.S. and Canada, building products distribution and lumber mills in impacted areas were shut down in March.
- Pricing Sentiment: The U.S. Federal Reserve Board reported that as of July 2020, the wood products industry was running at a capacity utilization of 70.6 percent, which was well above April’s level of 64.2 percent, but below the 76.9 percent seen in February, and off from the July 2019 level of 77.4 percent. As a result of the capacity issues as well as the robust demand, prices have been rising since April for most grades of lumber and structural panels. As of August 21, the Random Lengths Framing Lumber Composite Index was at a reading of $817, which was 134.1 percent higher than 12 months prior. Considering that pricing plummeted to a 2020 low in early April, the rate of the price increase has been historic, with traders saying that they have not seen a rise “comparable to the current one in their careers.” The index began the year at $375 and declined to $348 by April 10, before recovering.
- Valuations Outlook – Inventory: Inventory appraisal values for lumber and logs will be impacted from a pricing perspective, but on a mark-to-market basis should be stable.
- Valuations Outlook – Machinery & Equipment: The impact on equipment assets in the space will depend on how the recovery from the COVID-19 pandemic plays out over the next six months to a year. Prior to the advent of the pandemic there was already surplus equipment in the marketplace along with a surplus of older sawmill equipment (pre-2000). The market was stable for newer equipment (20 years or newer). At current volume levels, equipment values will be negatively impacted in the short term. Recent market contacts have noted, “this shutdown will affect the overall industry for at least six months,” although the recent price hikes have spurred inquiries for equipment in the marketplace as mills consider new equipment to support higher volumes. Once the immediate impact of COVID-19 has passed, the level of excess production capacity in the marketplace will drive additional surplus equipment to the secondary market. The impact of these additional surplus volumes will need to be reassessed at that time.
Date October 2021
Current Trends - COVID-19 Impacts
- During the pandemic, demand and pricing for lumber and panel products surged in response to the strong housing market and increased renovation and repair activity. Pricing peaked in March 20211, but had dropped 60% to 70% by September as the supply and demand imbalance improved.
- The annual rate for new privately owned housing starts peaked in March 2021 and had subsequently declined by 171,000 units or 9.9% as of July but rebounded slightly in August. Housing completions also peaked in March 2021 and had fallen by 11.2% as of August.
- Prior to the pandemic, industry capacity utilization exceeded 80%. By April 2020, this rate dipped as low as 67.9%. Utilization recovered to 80% by December and remained steady through July 2021.
- Building permit applications reached a 16-year high in January 2021 with an annual rate of 1,883,000 permits. By August, the rate had dropped back to 1,728,000.
- The U.S. Department of Commerce adjusted tariffs on Canadian softwood lumber from 20% to 9% in late December 2020 but recommended raising them again in May 2021. Tariffs with China and other countries remain relatively stable.
Approximate net recovery on cost
Housing Starts Holding Steady: Housing starts are a key indicator of the health of the construction industry and the demand for dimensional lumber. For August 2021, new, privately owned housing starts in the U.S. were at a seasonally adjusted annual rate of 1,615,000 units. While down from a high in March, this represented a 17.4% increase over August 2020 and a 23.8% increase over the 2016 to 2019 average rate. Similarly, new permit applications were down 1.5% from a March 2021 peak but remain 14.4% above the average 2020 rate and 24.7% above the 2016 to 2019 average rate. The August completions rate, which is a bit of a lagging indicator, was 11.2% below the March 2021 peak, slightly below the average 2020 rate by 3.1%, but still well above the average 2016 to 2019 rate by 16.3%.
The lumber market continues to benefit from three key trends, which emerged through the pandemic:
- Demand for single-family residential construction has grown as homeowners move to less densely populated areas.
- Repair and remodel spending continues to grow as homeowners spend more time at home and investing in their homes.
- Current demand exceeds the housing supply, a result of the early 2000s housing crisis’ lingering effects.
Because the first two trends are pandemic-related, they may subside once the pandemic ends. However, the third is a longer-term, positive trend for the industry. Additionally, the current low interest rate environment should support a higher level of investment in housing.
By contrast, construction rates and market velocity faced three challenging pandemic-related trends:
- Port closures early in the pandemic and port congestion during the global economic recovery resulted in logistics and supply issues that continue to curb the housing market. Additional constraints include crises like the Suez Canal blockage and extreme weather events like Hurricane Ida.
- COVID-19 outbreaks and ensuing health and safety measures like social distancing created labor shortages. Additionally, rising wages driven by inflation and pressure to increase the minimum wage are a contributing factor to these shortages.
- Rising raw material prices including record-high dimensional lumber, panel and steel prices have slowed housing construction.
Lumber Pricing Remains Volatile: Demand outpaced supply, driving softwood lumber and panel pricing to historic levels from late 2020 through the spring of 2021. Pricing surges affected all markets, including retail home centers, the wholesale contractor market and manufactured housing. The Random Lengths Framing Lumber Composite Price index reached an all-time high during the week of May 21, 2021, an increase of 272.9% over the same week in the prior year2.
The Chicago Mercantile Exchange reported dimensional framing futures prices peaked in early May 2021 at $1,698 per thousand board feet (MBF). Additionally, Random Lengths reported panel prices reached a historic peak in mid-June 2021, an increase 285.7% over the prior year’s level3.
Prices remain elevated though they have declined since hitting these peaks. Inflated costs, limited supply of lumber and other products and production challenges have shrunk the export market and domestic demand4. Lumber futures fell 70.1% by September 2021 from their peak in May, reaching a price of $500 per MBF5. Additionally, lumber and panel market composite prices dropped from their 2021 highs by 72.4% and 64.8%, respectively. Despite turbulent pricing, the market shows signs of stability6. In September, order levels increased 38.1% from their low points in May and June7.
While industry publications can indicate regional market trends, published prices do not necessarily represent transactional activity; instead, they generally represent full truckload quantities with free-on-board mill freight terms. Long-term supplier relationships, volume discounts and freight logistics can affect the actual gross recoveries in the event of a liquidation.
Rising prices have driven higher profits for many lumber mills and have frustrated distributors, largely because higher costs led to limited product availability. However, lean inventory levels and the inability to purchase products benefited some suppliers as prices collapsed in mid-summer 20218. Reported earnings for major lumber mills in the U.S. and Canada rose by an average of 795.6% and 4,292.6% respectively in the first half of 20219. The companies reported a somewhat muted outlook for the future. For example, the Boise Cascade Company shared the following in their latest earnings release:
“Although we believe that current U.S. demographics support the higher level of forecasted housing starts, and many national homebuilders are reporting strong near-term backlogs, labor shortages and supply-induced constraints on residential construction activity may continue to extend build times and limit activity. In addition, while the age of the U.S. housing stock and limited home inventory availability will continue to provide a favorable backdrop for repair and remodel spending, we expect the recent decline in home improvement demand to continue near-term as travel restrictions are rescinded and pent-up demand for leisure spending occurs.”10
The U.S. Federal Reserve Board reported the wood products industry had a capacity utilization of 79.8% in July 2021, exceeding the April 2020 level of 64.2%11. Most mills ran at nearly full capacity for the first half of 2021, despite labor and supply shortages12.
Canadian Lumber Tariffs Decline: The U.S. Department of Commerce adjusted tariffs on Canadian softwood lumber tariffs from 20% to 9% in late December 2020 but recommended raising them again in May 2021. Tariffs with China and other countries remain relatively stable. A Chinese tariff passed in June 2018 continues to limit U.S. hardwood exports to China. The Phase I deal reached in early 2020 did not reduce these tariffs despite expectations it would, and negotiations for the Phase II deal have yet to begin13.
Pricing for hardwood products and exports to China have declined in response to the 25% tariff levied in June 2018. In fact, exports dropped by 44.4% in 2019 shortly after the tariff passed. Anti-dumping tariffs were applied to Chinese manufactured moldings and millwork recently, at rates varying from 40.3% to 359.2%. The Chinese government issued exemptions for U.S. hardwood log exports in February 2020, providing some relief. This exemption was extended in March 2021 and is scheduled to expire in September 202114.
Tariffs enacted against Canadian softwood lumber imports in 2017 largely remained in place after the passage of the United States-Mexico-Canada Agreement (USMCA), which went into effect on July 1, 2020. After reviewing the tariffs, the U.S. Commerce Department lowered softwood lumber tariffs in December 2020 from the 2017 level of 20.2% to 9%. Record-high pricing in early 2021 drove other industries to request further tariff reductions15, but the Biden administration has not granted these requests and the Commerce Department recommended raising existing tariff rates from 9.0% to 18.3% later in 202116.
In addition, an August 2021 ruling by the U.S. Court of International Trade disallowed a Canadian company from quickly applying for lower countervailing duty rates if the rates were not individually investigated by the Commerce Department in its original duty inquiry. The August ruling reinstates higher duties for some Canadian lumber companies, although it will only apply prospectively17.
Geography May Limit Marketability: Freight logistics and cost tend to limit lumber distribution to the geographical area of a mill’s or wholesaler’s existing customer base. For example, wood products from the Pacific Northwest would not likely attract customers in Georgia because of the robust mill activity in the Southeast. As a result, the liquidation footprint would also be limited to the same area. Additionally, regional building practices, builder preferences and codes may limit the marketability of some materials. Tariffs and currency exchange fluctuations can also affect gross recoveries, as is the case of dimensional lumber milled in Canada for export to the United States.
Green Lumber May Have Lower Recoveries: Special consideration should be given to “green” and undressed kiln-dried lumber. Cut-to-length and tree-length logs are optimized to yield the longest length possible of specific dimensions. The cut lumber exits the sawing operations green and requires drying to reduce moisture content. Once dried, the lumber is then 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.
Demand for green or undressed lumber would be greater in a region with several local mills than one with a remote mill. Also, if regional mill activity is declining, the local demand for green or undressed kiln-dried lumber may decline. Freight logistics and costs will affect the prices potential buyers are willing to pay for this inventory.
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THE RECOVERY VALUES REFERENCED HEREIN ARE FOR REPRESENTATIVE TRANSACTIONS WITHOUT
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Reference sources: RISI FASTMARKETS, RANDOM LENGTHS WEEKLY REPORT, UNITED STATES CENSUS
BUREAU, CHICAGO MERCANTILE EXCHANGE, THE WALL STREET JOURNAL, BOISE CASCADE COMPANY,
U.S. FEDERAL RESERVE, CNBC, WOODWORKING NETWORK, REUTERS, FORTUNE, BLOOMBERG, IPOLITICS