This article was written in early September and published in the Truck Logger BC Magazine in early October. In the last two years, a lot can, and has, changed over a one-month period in lumber markets. As can be seen from the article, the expected outcome forecast is now occurring as lumber market prices slide and BC sawmill curtailments increase.
US Market Cooling Down; BC Sawmills in Trouble?
In mid-March 2022, US lumber prices (using W-SPF 2×4 #2&Better, random lengths, FOB BC mill, as the basis) peaked for the year at US$1,400 per thousand board feet and bottomed at US$555 in mid-June—a 60 per cent collapse in three months. A rally followed to US$670, but market uncertainty has since pushed SPF prices back to belowUS$500 at the time of writing in early September.
In May 2022, I addressed the question of whether BC sawmills were in trouble due to the US market cooling down and suggested that the W-SPF price would fall back into the mid-US$500s by late August. Ironically, that is exactly where lumber prices ended up but by early September, both cash and Lumber Futures were falling and lumber prices in the mid- to high-$400s to low $500s now looks more realistic before curtailments push prices back up. Looking ahead, the outlook for US lumber prices needs to incorporate both positive and negative factors to determine where prices could be heading in fourth quarter 2022 and early 2023. Below is a summary of some of the key drivers:
Key US & Global Drivers
DEMAND POSITIVES SUPPLY: POSITIVES
1.5 – 4.0 million unit US housing shortage Globally a tight supply of more expensive wood
Millennials are reaching prime ages for homes Russia ban on log exports (Jan 1, 2022)
US homeowners have huge equity in homes BC government old-growth, caribou & FN policies
Older US homes (~42 years) will encourage R&R Many BC sawmills are running 3-4 shifts per week
Low unemployment supports mortgages/R&R Shortage of wood in Europe from Russia ban
Dealer inventories are low, so steady buying Log harvest in New Zealand is flattening out
DEMAND: NEGATIVES SUPPLY: NEGATIVES
US housing starts headwinds Surplus wood from European spruce bark beetle
Soaring inflation and rising mortgage rates Cheap surplus logs in US South – more sawmills
Home builder & consumer confidence eroding Russia lumber exports flooding China
US existing house prices are high/unaffordable US 8.6% import tax lowered on Canadian lumber
Economic news points to a slowdown/recession
China market lockdowns & slowdown
BOTH: Russia-Ukraine War; Supply Chain Issues; Global Trade Flows
The opposing forces listed can create lots of scenarios and risks for the US market outlook going forward. However, all the negative factors are steadily outweighing any positive indicators. Consequently, my outlook for US prices to trade mainly between the mid-US$400s and the mid-$500s until the end of the year before the real impact of a potential US recession hits, most likely in 2023-Q1 (following one that is first expected in Europe). Be prepared for more uncertainty and volatility ahead!
The issue for BC sawmills, and especially those in the Interior, is that BC remains the high-cost producing region in North America. The culprit is not sawmill costs, but once again it is government stumpage costs with a secondary impact from logistical constraints in getting lumber to markets.
As I have outlined in previous articles and analyses over the years, BC’s timber pricing formula is flawed. Like Alberta, stumpage rates for sawlogs in the BC Interior are tied to lumber prices as well as several other variables (including competitive log sale prices from BC Timber Sales). Problematic for BC mills is the stumpage formula that features a three-plus month lag to actual lumber prices. This means that when lumber prices are rising, stumpage lags and companies can benefit with reduced delivered log costs (along with favourable lumber prices). But when lumber prices quickly move lower for longer periods, stumpage rates can keep going up for three to even six months due to the lag effect built into the formula. This was the case in the second half of 2018, where dozens of BC Interior sawmills had to curtail as lumber prices slumped, but stumpage prices kept going higher. This happened again in 2019 (to a lesser degree) and then again starting in 2021-Q3 when sawmills curtailed from an increase in stumpage charges of C$30/m3 effective July 1 as lumber prices were collapsing.
In 2022-Q3, BC sawmills are already curtailing in part due to logistic issues and a delayed summer logging season, but especially from the excessive government stumpage fees. Add in a raft of new incoming government polices (harvesting deferrals for old-growth and caribou, and tenure transfers from companies to First Nations), and the BC forest industry is in a big mess—again—but this time, it could be potentially worse than in previous years. The July 1, 2022, stumpage increase on sawlogs of around C$40/m3 came at a time when lumber prices had eroded by more than 50 per cent since their March peak. BC Interior sawmills’ breakeven price in 2022-Q3 is estimated at between US$550 and $600/Mbf. When prices get closer to US$500 or dip into the $400s, as they did at the beginning of September, more BC mills will have to face the prospects of curtailment. And I do not rule out further permanent mill or shift closures by the end of the year, as more mills will need to eventually close from reduced timber supplies.
As I have mentioned before, BC’s stumpage formula creates disadvantages for loggers and sawmill workers when quarterly stumpage fees are a complete mismatch with lumber prices. Mill owners do not want to burn cash for long, so many will initiate slowdowns or curtailments. Alberta’s stumpage formula has only a one-month lag (and has wild fluctuations), but mills do not normally curtail. New Brunswick’s stumpage prices continue to be set at a flat rate (although it will increase soon after six years of no change). It is no wonder that the US side can be so puzzled by provincial stumpage prices? The graph above shows little consistency between provincial government stumpage rates as an indicator of fair market value for logs.
Russ Taylor, President, Russ Taylor Global