Note: This article was originally written in early March 2023 and was then published in the April 2023 issue of The Truck Logger BC Magazine. Some updates up to April 7 have been made to the original article are included below.
As we move into March 2023, there are still many headwinds facing the BC sawmilling industry. Mill curtailments, both in lumber and pulp, have become a regular occurrence since 2022-Q3 from low lumber prices and dwindling log and by-product volumes. As the high-cost log, and therefore, lumber producer in North America, almost all of the curtailments have occurred in BC as lumber markets became over supplied. In previous articles I have discussed the major problems with BC government stumpage formula for logs, but I will leave that topic alone.
There are a number of key factors that have been negatively influencing the US lumber market since the middle of 2022, including high house prices coupled with a relatively low housing inventory, low builder and consumer confidence, rising home builder cancellations, etc. High interest and mortgage rates to fight inflation in the US and Canada have the major cause a slowdown in lumber demand. US mortgage rates have consistently been in the 6 to 7% range since mid-2022; it anticipated a housing market revival will require mortgage rates closer to 5% and, preferably, much lower. Lower rates are not expected until very late in the year or early 2024, so that will negatively impact housing starts (35% of US lumber consumption), which I expect to be closer to 1.2 million units in 2023 as compared to 1.55 million units in 2022.
Repair and remodelling (R&R) demand (40% of US lumber demand) grew slightly in in 2022, but is expected to have negative growth in 2023. Forecasters’ R&R growth rates range between -5% and -10% for 2023, but I expect the R&R growth will be more favourable with a smaller negative growth, especially with very low building material prices expected to in effect for the year .
For 2023, I expect North America lumber demand be lower by 6-7% with the first half of the year being most troublesome. I continue to “bet” against the consensus forecasts which have consistently been wrong through the pandemic; I have been following more of the contrarian view that has been incredibly accurate!
Changes in North American lumber capacity have been very significant over the last five to ten years. For example, since 2014, the US South capacity has grown by over 40% due to some 60 sawmill projects (expansions and greenfield mills). In contrast, BC production has fallen by 30% over the same time frame with further reductions to come. The US West and Canada East have been relatively flat with few changes in the overall industry capacity. .
The growth in US South lumber capacity has been incredible. With the lowest delivered log costs in North America (and essentially the world) averaging around US$45/m3, and with 55% of North American demand located in the region, sawmill expansions have been steadily growing. From 2018 to 2022, there were about 7 billion bf (11 million m3) of new capacity installations. However, there has only been a 50% increase in output, meaning that with delays in startup, coupled with COVID issues, there is a lot more production that is still going to come from existing projects. Based on data from Forisk, they indicate that 1.3 billion bf of sawmill capacity came on-line in 2022 via greenfield projects and capacity expansion projects. In 2023, Forisk anticipates an additional 1.8 Billion bf of Southern sawmilling capacity to come on-line, with another 1.2 billion board feet of capacity to be completed by the end of 2024. Take-away message: there will be lots of incremental southern yellow pine lumber available over the next few years and this will put pressure on higher cost operating regions like BC.
In contrast, there has been at least 1.7 billion board feet of announced capacity curtailments in BC during 2022, mostly a result of increased log prices and falling lumber prices. BC mill curtailments and closures have continued in the first two months of 2023, with five pulp mills also curtailing from a lack of residual chips from sawmills. Quite unprecedented!
BC continues to be plagued by more ill-timed government policies, including old growth deferrals, landscape planning initiatives, caribou protection, carbon capture, and tenure transfers to First Nations from existing forest license holders. On top of these, there are continued beetle losses (mountain pine, spruce and Douglas-fir beetles) and wildfire impacts. Coupled with low prices and high log costs, BC lumber production was lower in 2022 vs. a year earlier by 14.6% – a drop of almost 1.4 billion bf.
In January 2023, BC output was down by another 30% (-223 million bf) – a poor start to the year as BC mills were curtailing due to high costs and low lumber prices. BC mills accounted for about 70% of North America’s 400+ million bf (640,000 m3) of curtailments in 2023-Q1 plus there was an additional 1 billion bf (1.6 million m3, net) of permanent BC mill closures announced in the quarter. The rest of Canada’s production was flat in January (+38 million bf). Even with all the other curtailments and closures, there still appears to an excess of lumber mill capacity/production (and European import volumes) in North America relative to market demand.
In the US market, Canada represents only 83.0% of US imports, where Europe now has a 12.5% market share (led by Germany with 6.2%; Sweden with 2.6%, and Romania at 1.7%). Between 2010 and 2016, Canada averaged more than 96% of total US imports each year.
The low-grade lumber market in China for BC is almost finished (less mountain beetle-killed timber), as Canada export volumes have eroded from 5.6 million m3 in 2013 to well under 900,000 m3 in 2022. BC lumber prices are so low in early April 2023 that exports to China could start to pick up, as the returns are looking closer to US market returns. However, the China market is flooded with lumber high inventories, as the February 2023 levels were 33% higher than during any month in 2022. With the slow take-aways at ocean ports, this situation will likely cause Chinese prices to ease further.
Japan exports were lower from European competition in 2022 but should be steadier in 2023.
After two spectacular years in 2021 and 2022 where the benchmark W-SPF 2×4 #2&Better (FOB BC mill) lumber price averaged US$869/Mbf and US$776/Mbf, respectively (and before US import duties), prices collapsed in in 2022-Q4 where they have been below US$500/Mbf and, unfortunately, below US$400 for most of time into March 2023. With BC SPF mill costs typically over US$500/Mbf during this time, this is why BC sawmills have been curtailing.
In the US, poor weather, slowing sales and high interest rates have stalled the housing and lumber markets. North American lumber prices in early April 2023 remain subdued, with the benchmark W-SPF 2×4 #2&Better, random lengths (FOB BC mill) back to its exceptionally low levels achieved in early January at US$335/Mbf (US$470/Mbf delivered US East Coast; euro 279/m3, net). These price levels are well below the breakeven levels of all BC sawmills, some mills elsewhere in North America, and many European mills!
As in my January 2023 TLA report, I still expect the average W-SPF 2×4 #2&Better lumber price for 2023 to be “near US$475/Mbf” (FOB BC mill; US$300/m3; ~US$385/m3 delivered US east coast ports). However, with that forecasted price now about the middle of the consensus (and the consensus typically being wrong), I now expect prices to average considerably lower than US$475 (US$307/m3, net) in 2023, especially as the 2023-Q1 average price for 2×4 #2&Better was only US$384/Mbf, FOB mill. This is not good news for high cost regions and/or sawmills!
It is going to be a tough second quarter in 2023, and probably a tough year.
RUSS TAYLOR GLOBAL
Note: Originally written in early March 2023; text and prices updated to April 7, 2023 to the original TLA article,
Published by Truck Logger BC Magazine in early April 2023 and the original article is shown on Pages 20-21. https://mydigitalpublication.com/publication/?i=787447