Lumber prices – up, thanks to the Canadian wildfires

But that won’t last long if residential construction turns down.

In June and July, Americans from Boston to Chicago began to experience orange skies and to breath foul air, as smoke from Canadian wildfires created uncomfortable, and sometimes hazardous, conditions. At one point, one-third of the U.S. population was under an air quality alert. That’s to say nothing of what the Canadians were going through.

The situation only got worse from there. According to the Canadian Interagency Forest Fire Center, there were 963 active fires burning at the end of the first week of September, 600 of those characterized as being out of control. That compares to a total of around 400 fires reported in early June, nearly 500 in early July, and around 1,000 in late August. The wildfire season in Canada usually runs through October.

Year to date, over 6,100 fires have been reported, which have burned over 40 million acres of land—the largest area ever recorded in a single year, according to a report from Forest Economic Advisors, a Massachusetts-based wood and timber database. That’s a good deal more than usual—since 1990, wildfires across Canada have consumed an average of somewhat over 6 million acres per year.

Forest fires are a natural phenomenon in Canada, and the United States for that matter, and some, of course, are also caused by human negligence and recklessness. But this season, Canada got off to an unprecedented start, and the wildfires have proceeded apace. In the U.S. the effects were still being felt in late August, where less-than-optimal atmospheric conditions were seen in Buffalo, Cleveland, Chicago, and Minneapolis. In the first days of September, heavy smoke was inundating eastern Montana, the Dakotas, and Nebraska. At the end of the first week of September, a column of moderate smoke stretched down the middle of the country all the way to Alabama and Mississippi—and the wildfires were still burning.

Impacts on Lumber Supplies

Given that the wildfires are destroying forestlands, the question arises whether they will have an adverse effect on the supply of timber and, therefore, provide a boost to the price of lumber. The answer is yes—to a certain degree. Lumber prices have ticked up in recent weeks, but it’s questionable whether the phenomenon will continue. That’s because some prognosticators foresee a downturn in housing construction, and, if that comes about, the supply deficit may not be so egregious compared to demand.

Besides the destruction of timberland, the paucity of supply was also related to the closure of sawmills. Resolute Forest Products Inc., for example, a Montreal-based company, temporarily shut down four of its sawmills in Quebec due to nearby fires and related log shortages. Resolute also paused harvesting activities in areas near the wildfires.

That’s been true elsewhere in Canada as well, according to the FEA, which reported that “a scattering of mills closed temporarily” and that the fires “altered some harvest plans.”

In late July, Statistics Canada (StatCan) reported that construction costs for residential building in a composite of eleven metropolitan areas climbed 7.5% year-over-year in the second quarter of 2023, led by a 13.0% increase in Toronto. Non-residential building construction costs, meanwhile, increased only 1.5% in the second quarter, suggesting that the price of lumber factored into the increase in residential building costs.

Further proof comes from the National Association of Home Builders, which reported that, in the U.S., 2023 has seen a “continuing trend of slowing price growth that began in 2022”—but that trend did not apply to lumber. NAHB’s Producer Price Index (PPI) gained 0.5% in the first half of this year and has not increased 1% or greater in any month since March 2022.

“The growth rates of the index for final demand goods has slowed 12 consecutive months, which hasn’t occurred since the inception of the series,” noted David Logan, director of tax and trade policy analysis at NAHB. “The PPI for goods inputs to residential construction, including energy, has decreased 3.6% over the past 12 months—the largest 12-month decline since October 2009.”

Canada Softwoods

But the PPI for softwood lumber, important in residential construction, increased 3.9% in June, representing the second increase over three months. That contrasts to decreases in prices for gypsum, which also fell in April and May, and steel, which fell 0.6% in June, after a four-month streak of higher prices, while concrete prices increased 0.5% in June. Freight prices, it’s also worth noting, fell in June across the board, for truck, rail, and ocean.

Canada supplies 80% of U.S. softwood lumber imports, according to Natural Resources Canada, a Canadian government department. During the first quarter of 2023, the provinces of Alberta and Quebec accounted for 44% of total lumber shipments and 45% of total production—and those two areas have been the hardest hit by wildfires. In other words, the wildfires are affecting a meaningful share of Canada’s timber harvest.

The price of lumber continued to rise through mid-July, according to Trading Economics, which reported prices at that point 33.5% higher than in early May. Prices retreated somewhat in August, because, according to the Madison Lumber Reporter, “At this time of year it is normal for construction activity to slow down as folks take off for the last vacations before Labor Day and back to full-time work in September.”

But as of the end of the first week of September, lumber prices were still in retreat, a sign of a possible slowdown in the residential construction sector, a phenomenon already being seen in Canada. “The signs are promising for the Canadian economy overall, but the construction industry faces lingering challenges,” said Patrick Ryan, an executive vice president at Linesight, a construction consultancy based in New York. “The construction industry is expected to shrink by 5.2% in 2023 as the residential sector has declined more than expected.”

As for lumber prices, they achieved stability earlier this year after two years of volatility. “Prices picked up due to the wildfires,” said Ryan. “Prices may appreciate slightly in the coming months, but the trend in coming quarters looks to be one of weakness due to the housing downturn.”