What Are Lumber’s Long-Term Price Prospects? Odds Are Good They’ll Stay Close to Current Levels
The consultants at Forest Economic Advisers (FEA) earn most of their living telling timber companies worldwide about the current state and future prospects of logs and lumber. Based on their presentations at FEA’s Forest Products Forum on Sept. 17, lumber dealers can expect that—barring bad weather or a surprise crisis—prices in coming months will do no more than rise modestly.
“2020 has to be better, if only because mills cannot afford to produce,” FEA principal Paul Jannke told the audience at the event in Portland, Oregon’s World Forestry Center. Given current prices, mills in every major region of North America except the Southern states are losing money if you include operational and investment costs, he said. Several dozen mills, particularly in the Pacific Northwest, have announced closures that will reduce capacity by 1.4 billion board feet and curtailments that take away another 1.2 billion board feet.
In essence, by reducing supply, the mills are increasing demand for the remaining fiber. As things now stand, Jannke predicts that prices for Western SPF 2x4s would grow to near $400 per 1,000 board feet by late 2020 or 2021, then slide to about $350.
FEA economist Brendan Lowney said he believes that the coming recession will be relatively mild—similar to what America went through around 2001—and also will be one in which housing will outperform. He gave several reasons why, depending on your point of view, the glass is half full or half empty. Among them:
* We’ll have about 1.3 million housing starts this year, barely different from 2018’s total of 1.273 million.
* Demand remains strong, particularly in states like California, which has created 17% of all new U.S. jobs in the past five years but accounts for only 6.8% of the single-family housing starts and 11.8% of the nation’s multifamily starts.
* In part because of the labor shortage, wages paid across the country—particularly to millennials—are rising.Interest rates look likely to keep mortgages attractive.
* On the other hand, the benefits of higher-paying jobs and lower mortgage rates are counterbalanced by a lack of affordability, particularly for millennials who remain burdened by student loan debt.
As for how timber species affect prices, FEA’s Rocky Goodnow predicted Southern timber prices will stay relatively low. One reason why is the region’s increased production: New, greenfield mills are adding 3 billion board feet of production capacity, while expansions of current mills will boost potential output by an addition 2 billion board feet. The South now is the cheapest region in North America to manufacture lumber. Meanwhile, tariffs imposed by the Chinese have weakened Southern yellow pine’s export prospects. Export volumes so far this year are down 23%.
Demand will keep rising in coming years “to the harvest levels we saw in the early 2000s,” Goodnow said. “But over the near term, we see flat harvests, and that will translate to flat pricing for Southern log prices. ... We are looking for stumpage prices to remain flat.”
West Coast saw timber harvests will remain below recent levels, partly because of softening in the export market (particularly for spruce, which gets a 20% tariff when it lands in China, vs. Douglas fir and hemlock, which are subject to a 5% tariff). Private timber supplies in the West remain tight, and access to public lands continues to face challenges from environmentalists.
As a result “West Coast delivered log prices will dip in 2019 before rebounding modestly in 2020,” Goodnow said. “We’re not expecting a sharp increase in pricing, but we do expect a bounce off the bottom.”
In British Columbia, authorities have reduced the allowable cuts by 10% in coastal sections, 8% in the northern interior of the province, and 24% in the southern interior. The impact of the mountain pine beetle is showing up now, Goodnow said, and British Columbia now is bedeviled by the spruce budworm. On top of all that, there are drives to protect caribou habitat.
Add all that up and the province is hurting. The area has seen more mill closures and curtailments than any other part of North America.
Of course, timber companies sell wood for more than just building homes. America’s overall consumption of North American softwood products was about 6% lower in July of this year than in the same month of 2018. But that 6% looks good compared with the declines of 10% and more we had seen earlier this year, Jannke said, and as time goes on the year-over-year numbers will turn positive.