The gains probably aren’t the start of a wild ride like this past spring, but they show how some of this year’s rise in the price of raw materials has persisted
At $627.50 per thousand board feet, lumber futures are almost as expensive as they were before the pandemic. Analysts say there is a need to raise prices to balance supply with demand.
This could come as a blow to builders and other buyers, who expect market-equilibrium lumber prices to be closer to $357, which was the average of futures between 2015 and 2019.
“We think it’s the $100 run that we’ve seen so far that we haven’t completed yet,” said Paul Janke, lumber analyst at Forest Economic Advisors LLC. “We think that over the next few years, on average, prices are going to come down, but they are going to remain high relative to history,” he told Canadian Imperial Bank of Commerce clients in a presentation this week.
This year’s wooden bubble propelled futures to $1,711.20 and prompted fears of runaway inflation. When it exploded, investors and policymakers, including Federal Reserve Chairman Jerome Powell, pointed to the lumber drop as a sign that rising prices as the economic reopening was the result of kinked supply chains and Clumsy restarts will fade with distance.
At a congressional hearing on Tuesday, however, Mr. Powell said the inflation explosion this year has been wider and more persistent than anticipated as supply chains remain stuck. Lumber’s late-season climb is part of a broader rally in commodities that saw natural gas prices up 61% in the third quarter and oat futures trading at record highs.
Paintmaker Sherwin-Williams Co told investors this week to expect lower sales and profits this year due to a shortage of some materials and more expensive inputs such as solvents and steel. The situation has worsened since Hurricane Ida hit Louisiana last month and disrupted operations at chemical plants and gas platforms along the Gulf Coast, the Cleveland company said.
“In addition to significant supply challenges, raw material prices remain extremely high,” Chief Executive John G. Morikis told analysts on Wednesday. “We continue to counter these increased costs with pricing actions across our businesses.”
Large buyers of lumber, from home builders to hardware stores and even casket makers, say they are still working through inventory of lumber that was made earlier this year at high prices .
Builders including lenar corp.
and Toll Brothers Inc..
, says that most of the houses he has built recently were made from wood purchased at high level. They say their profit margins should improve next year as the homes that started now are being constructed with wood as prices are at a peak. But lumber bills are not likely to be nearly as low as had been estimated a few weeks ago.
Sawmills in British Columbia began reducing production in July because wildfires made it difficult to obtain logs and deliver timber to customers.
Meanwhile, the cost of purchasing lumber from the provincial government has risen sharply. The price of a so-called stumpage in British Columbia is determined by the prices of lumber months in advance. This means log prices have gone up to reflect the spring increase, along with a fall in timber prices. As a result, many mills in one of the continent’s top timber-producing regions will suffer unless log prices ease next year, analysts say.
Canfors, which cut production due to wildfires, made deep cuts in August, bringing all but one mill in British Columbia to about 80% capacity. West Fraser Timber Company.
, which is North America’s largest timber producer, cut production at its mills in Canada and the US by between 5% and 10%. West Fraser blamed the fire, as well as material and labor shortages, transportation problems and expensive logs.
Several companies, including West Fraser and Canfors, plan to increase capacity in the US South, where timber glut has made the region the most profitable location in North America for timber production. But those projects can take months and sometimes years to complete.
Georgia-Pacific said Wednesday it will spend $120 million to expand and modernize its lumbering facility in Pineland, Texas, to increase capacity by about 18%. The company is expected to be liquidated at the end of next year.
Analysts say that in the near term, lumber prices should rise to bring British Columbian mills back to profitability and full operating capacity. According to Forest Economic Advisors, without strong production from Northwest Canada, demand could overwhelm dealers who have less lumber, as measured in months of supply, than at any time in the past 20 years.
“There will still be a lot of supply chain issues over the next few months and dealers don’t want to be caught with short supply,” said Russell Taylor, a Vancouver lumber market consultant. “We’re going to see very volatile prices.”
Write Ryan Dezember at [email protected]