After more than two years of sharply declining hardwood lumber demand and prices—and a 17-year trend of declining real (inflation-adjusted) prices—North American producers are now 19 months in to the greatest and most unique market run-up in history.
Understanding what makes this run-up so unique requires some background understanding of what drives price changes. While demand and supply are always relative to each other, supply concerns (most often, fear of supply shortages) typically drive short-term price spikes. This was the case in 2009-2010 and 2013-2014, when the economy was coming out of the Great Recession and buyers feared there was not enough lumber manufacturing capacity to meet demand. [It is estimated that 40% of US sawmills were forced out of business after the furniture manufacturing sector offshored a significant percentage of production at the turn of the century, and that 40% of the remaining mills closed following the housing and stock market collapses of 2006-2008.]
Each of those one-year price spikes was followed by an equally dramatic collapse when buyers came to understand that sufficient sawmilling capacity remained. Contrast the steepness of those supply-driven spikes with the more gradual price increase from late-2015 through mid-2018 that was driven by sustained growth in Chinese demand. Clearly, then, the current market run-up is mostly a supply issue, though shifts in global demand have worked to sustain it.
WHAT MAKES IT THE GREATEST RUN-UP?
The speed, magnitude and breadth of the current market run-up make it arguably the “greatest” ever.
From October 1, 2020, to October 1, 2021, our kiln-dried lumber price index (the average prevailing price of seven key indicator items) rose an average of US$62 per thousand board feet (MBF) per month. FAS/1F hard maple accelerated as much as US$155 per month, with contacts often reporting US$100 weekly increases. Upper-grade white oak rose US$163/MBF per month during that 12-month period, and FAS/1F yellow poplar (tulipwood) rose an average of US$83 per month, which is astonishing considering that poplar prices didn’t move up or down more than US$5 or US$10 during the five-year period from 2014 to 2019. In normal times, a US$40 change in a given month would be big news for any of these species.
Naturally, sustained increases at those paces generated massive total gains. Between October, 2020, and their respective peaks, Appalachian KD 4/4 FAS/1F lumber prices rose 49% to 119%. Only upper-grade red oak and cherry failed to reach all-time record high nominal prices, though both have been climbing again in recent weeks. At the other extreme, ash, hard maple and soft maple prices are still climbing, with gains now totalling 79%, 119% and 98%, respectively. Even those species that have now passed their pricing peaks are still priced way, way above of pre-run-up pricing. Furthermore, after decades of declining real prices, all grades of 4/4 hard maple, soft maple, poplar, white oak and walnut are now pacing ahead of 26-year inflation.
Historically, prices for one or two species might spike while others languish. Hard maple prices get too lofty or supplies tighten, for example, which causes a spike in soft maple demand and pricing. Or, cherry falls out of favour due to shifts in consumer fashion or the availability of lower-cost substitutes. Further, grade lumber markets (FAS/1F, #1 Common, #2 Common) might be strong while low-grade markets (#2&3A Common, pallet cants, railroad ties) are weak. During the current historic event, however, prices for every species, every grade and every thickness of North American hardwood have soared. And, low-grade markets have risen right along with surges in grade lumber prices.
WHAT MAKES IT UNIQUE?
In 2004, as China came to dominate demand for US hardwood lumber, the trend in hardwood lumber prices “de-coupled” from the trend in US inflation. In the 17 years that followed, our kiln-dried lumber index more closely tracked with the trend in export volumes to China. By 2017, more than half of all US hardwood lumber was exported, and 55% of all hardwood lumber exports went to China, meaning one of every four boards sawn went to China. That relationship was broken in October 2020, when lumber prices began to soar while exports to China continued to decline, making this the first market run-up in recent history not driven by export markets.
Instead, this increase was driven by supply shortages that resulted from external constraints on industry production and delivery. At the start of the surge, hardwood logs were in very short supply. Then came labour shortages, brought on by the pandemic and the government’s enlarged and extended worker relief benefits that were often larger than the salaries mill workers would have obtained by going back to work. Soaring costs of overland and ocean freight – coupled with extreme shortages in truck and container availability – only made matters worse. Finally, when pine lumber prices soared, a number of hardwood mills in the far north and deep south switched to sawing pine, further limiting hardwood lumber availability.
On top of limited availability, domestic US demand in 2021 was the highest in many years, fuelled in part by government stimulus; in part by pent-up demand for furniture, cabinets and flooring following a year of lockdowns; and in part by a wholesale shift in people working from home, which drove demand for larger homes and remodelling to outfit home offices. That rising domestic demand – along with much stronger demand from Mexico, Europe and Canada – offset declining Chinese demand. And, with availability limited and unsold inventories non-existent, it also limited the ability of Chinese buyers to force prices lower. In 2021, China accounted for just one-third of US hardwood lumber exports.
The rapid increases in our KD price index levelled out in mid-August 2021, and the index peaked a few dollars higher late in October, exactly one year after it began to shoot higher. It fell about 2% by mid- February, but has been climbing slowly since, reaching a new high the week of April 22. So, eight months after plateauing, average prices remain at all-time highs. In contrast, the last three market peaks lasted for nine weeks (2010), five weeks (2014) and five weeks (2018) before turning quickly lower, making this the first market spike in at least three decades that has not ended in an equally dramatic collapse.
OUTLOOK
The same forces that drove this market higher and have sustained it at peak levels for the last eight months will keep it strong for the foreseeable future, at least through 2022.
US domestic demand is coming into its peak summer season, and exports to Europe and Latin America have started the year stronger even than last year. More importantly, while there have been modest improvements in labour availability, trucking and shipping issues have only worsened, and mills will be reluctant to produce more lumber than they can move. Some lumber inventories have built in the US, but most of it is lumber that is already sold and waiting to ship. And, with China now a relatively smaller factor in total demand, sellers are able to say “no” to low price offers and still continue to move everything they produce…just as soon as the trucks and containers arrive.
