Lumber Prices – What is going on?
In November of 2020, lumber prices began to increase which rivaled the Yukon gold rush. A series of production issues coupled with the pandemic effect on both the supply and demand side, lumber inventories evaporated and lumber became a scarce commodity. Only recently has the unprecedented price increase become a rapid price decrease as supply and demand are equalizing.
Lumber production shutdowns during the pandemic, alongside swift economic recoveries as the US and Canada reopened, are key factors in an unprecedented number of shortages across the global market. These shortages are of various goods, from used cars to avocados to shipping containers. One of the most economically consequential is the shortage of wood and wood products. Wholesale lumber prices have climbed over 300% above the pre-pandemic norm.
The lumber supply and demand during this period created a perfect price increase storm and at the center of the storm was the global pandemic. As the COVID-19 pandemic spread, sawmills cut production and unloaded inventory in fear of a forecasted housing crash. However, instead of a crash, a housing market boom occurred. Americans rushed to retailers to purchase materials for do-it-yourself projects and at the same time, recession-level interest rates turned the housing market red hot. Feeding the housing brush fire, a large number of first-time home-buying millennials entered the market. Housing inventory dried up quickly, sending buyers looking for new construction. Home improvements and new construction consumed huge portions of the lumber inventory, and production couldn’t keep up. Demand significantly outstripped supply.
Impact on Paper Manufacturing
During this period, paper manufacturers found themselves in a difficult position, as they also competed for the same forest products’ raw materials. Not only does this lead to the increased cost to produce pulp, paper, and nonwovens cellulose, but it also makes it harder to sell finished goods, as prices must be raised to cover the additional cost of raw materials.
As lumber prices increased, market prices for pulp jumped from $606 per metric ton in September 2020 to more than $907 per metric ton in April 2021. These monthly price increases have never been seen in the history of the paper industry. According to paper industry analysts, a combination of factors has driven prices higher, including a post-Covid recovery in China (the largest buyer of pulp in the world) and global shipping delays.
Consumer manufacturers purchase pulp on the open market and then use it to make toilet paper and other tissue products. Of the pulp that US consumer manufacturers buy for toilet paper about 70% comes from Brazil and 30% from Canada. Toilet paper prices increased 15.6% during the 52 weeks from May 2020 to May 2021, and they are predicted to continue to rise for the remainder of 2021.
Forecasting has struggled to be reliable in wake of unprecedented business conditions due to the global pandemic. Earlier in 2021, and as recently as June, it was estimated that it would take until the end of 2022 to see a significant reduction in price. However, this prediction has proven to be flawed as even now wholesale lumber prices are currently in a severe correction. Lumber prices are down over 50% from the all-time high on May 28.
What’s driving the price correction? As lumber prices climbed, demand from home construction and home renovations dropped over 8% from their peaks in March. At the same time production of lumber was ramped up to cash in on record-high prices. Today, the wholesale price of lumber is still well above its pre-pandemic pricing. Despite this, it is significantly less than the May peak. It is reasonable, despite the correction, to expect that lumber prices will continue to remain above their norms for the foreseeable future.
Wholesale price reduction does not and will not match retail in the short term. As wholesale lumber prices fall, lumber retailers will eventually be forced by competitors to reduce the price of their wood products. This process, however, could take weeks or months to be seen on the retail side. Furthermore, there are still factors in play that can and likely will affect the supply side. One unknown is the potential for a drought-induced heavy wildfire season in the U.S. Pacific Northwest and British Columbia (the center of the North American lumber industry).
As economies reengage from their pandemic lockdowns, the trends of home remodeling and new construction are beginning to taper off, weakening the overall lumber demand. This is unlikely to be true of other commodities, such as gasoline. Demand for oil is expected to grow as people return to commuting and travel more for pleasure. While there are likely to be many market corrections to come, the direction of the lumber price correction does not correlate with many other markets.