Lumber prices have recently experienced a volatile 2021 amid supply chain challenges and booming downstream markets.
In 2021, reduced sawmill capacity and rapidly rising demand for wood products for remodelling and construction activity in Canada and the United States drove lumber prices up to more than USD$1,500 per thousand board foot.
Higher disposable incomes and more remote work arrangements incentivized Canadian homeowners to increase spending on renovation projects 14.2% in 2021. Meanwhile, affordable financing conditions and pent-up demand for new homes increased residential construction, with housing starts rising 24.8% in 2021 alone, further raising lumber demand.
As wood products became more expensive, demand for remodelling projects cooled. Sawmills also expanded production, which further contributed to declining prices. However, in late 2021 supply chain challenges caused lumber prices to reverse course.
In November, heavy flooding in British Columbia hampered sawmill activity, preventing access to forests for timber and railways for transporting finished products, tightening lumber supply and contributing to higher prices once again.
Supply chain challenges
In early 2022, prices of more than $1,000 per thousand board foot once again encouraged expanded sawmill output and began to contract demand from the DIY remodelling market.
However, rising inventories at sawmills due to the inability of producers to transport lumber reflects a new round of challenges.
In Western Canada, rail capacity shortfalls are the latest supply chain disruption to weigh on sawmills and other wood product manufacturing industries. This has been caused by surging demand for shipping, track damage caused by flooding and seasonal factors limiting rail transport.
As a result of these backlogs, some sawmill operators have reduced operating schedules. In February, West Fraser Timber Co. Ltd. temporarily cut back operations at its British Columbia locations due to transportation backlogs.
More recently, Canfor Corporation announced it would run on reduced operating schedules due to unsustainable inventory levels.
An ongoing trade dispute with the United States includes a series of import duties on Canadian softwood lumber. Higher lumber prices are likely to lead to these tariffs decreasing in mid-2022. While this will save lumber producers money, the overall effect on lumber prices from these changes is expected to be minimal.
Outlook
Currently, lumber has yet again declined to about $900.00 per thousand board foot. Rising inventories and the increasing cost of wood products for DIY remodelling pulled down prices.
Several factors are likely to influence the trajectory of lumber in 2022. While transportation difficulties will likely continue contributing to imbalances in the lumber supply chain, housing market developments are expected to be the primary driver of further volatility over the coming months.
As the Bank of Canada and the US Federal Reserve begin to raise interest rates in response to recent inflation, mortgage rates have increased. This has affected the affordability of purchasing a new home and is expected to gradually lower borrowing activity.
However, given the high number of homes currently under construction, it is likely that demand will remain elevated as lumber is required to complete ongoing building projects.
Housing trends affecting the outlook
According to the Canadian Mortgage and Housing Corporation, housing starts reached 68,958 units, while housing completions reached 56,207 units in Q4 2021. Over time, this gap is also reflected by the number of housing units under construction, which reached 337,459 units during the same period.
A similar trend is reflected in the United States, with housing starts remaining at 1.7 million units, while completions reached 1.3 million units in Q4 2021. Demographic trends as millennials reach homebuying age have also continued to influence residential development in recent years.
As a result, lumber prices are likely to remain relatively elevated—though economic headwinds, including continued shipping challenges, rising building costs and tighter financial conditions are expected to contribute to further volatility over the coming year.
