North American lumber producers face a multi-layered challenge as permanent capacity closures, steeply rising Canadian duties, and potentially transformative Section 232 tariffs converge to create what could be the most disruptive trade environment since the Smoot-Hawley era. These shifts are occurring while the market continues to work through post-pandemic demand recalibration, with consumption still approximately 9% below COVID-era peaks.
“We are dealing with a massive event that could literally cancel out a century of tariff reductions from globalization,” explained Dustin Jalbert, senior economist for wood products at Fastmarkets, at the outlook presentation held on the sidelines of the 2025 Montreal Wood Convention. “Even if the most extreme tariff scenarios don’t materialize, the industry cost curve is fundamentally shifting.”
A significant downside risk looms, however, if the broader economy enters a major recession accompanied by sustained high mortgage rates. Unlike typical downturns where housing demand might benefit from countercyclical monetary policy easing, retaliatory measures from China and other trading partners could keep bond yields elevated. This worst-case scenario – combining demand destruction with stubbornly high 30-year mortgage rates – would compound the industry’s challenge by eliminating the typical relief valve of lower financing costs stimulating housing activity amid economic weakness.
Capacity rationalization: 5 BBF and counting
The North American lumber industry has undergone unprecedented capacity rationalization, with approximately 5 billion board feet (BBF) of indefinite or permanent sawmill closures over 2023-2024 alone. While 2023 shutdowns were concentrated primarily in British Columbia, the 2024 closures of 3.2 BBF were more geographically dispersed, affecting operations across BC, the Pacific Northwest, and even the traditionally resilient U.S. South.
“This is a wipe-out year,” Jalbert noted. “I know it’s a rough year for capacity closures when I keep having to fiddle with my font and make it smaller and smaller to fit it all on one slide.”
British Columbia’s production has experienced a structural decline of nearly 50% since 2017, dropping from approximately 13 BBF to around 7 BBF annually. This collapse stems from a confluence of factors: diminishing recoverable timber from the mountain pine beetle epidemic, old-growth habitat protection policies reducing Annual Allowable Cut (AAC), and the persistent burden of U.S. countervailing and anti-dumping duties.
Perhaps most telling for market observers is that 2024 marked the first year since 2020 that North America experienced a net reduction in operable sawmill capacity, despite continued SYP capacity expansion in the U.S. South. Fastmarkets projects this net capacity decline will accelerate in 2025, with another reduction, albeit smaller, following in 2026 as the “slow-burn bull whip of supply adjustment” continues to work through the system.
The triple threat: duties, Section 232 and IEEPA tariffs
The emerging “Trump Tariffs 2.0” environment introduces multiple, potentially overlapping trade barriers that could fundamentally alter North American supply patterns. Industry participants must now navigate a complex web of policy measures:
- Administrative Review 6 (AR6) duty increases: The sixth administrative review of countervailing and anti-dumping duties on Canadian lumber is set to increase the combined rate from 14.4% to approximately 34.45% by summer 2025 when published in the Federal Register. Notably, these deposit-based duties directly impact production costs for Canadian mills, unlike retroactive duties in previous review periods. “We were anticipating around 30%; 34% is even steeper,” Jalbert observed.
- Section 232 National Security Investigation: Announced March 1, 2025, this investigation designates lumber and other forest products as “strategic goods” on par with automobiles, steel, and aluminum. While the Department of Commerce has up to 270 days to complete its investigation, Fastmarkets’ baseline scenario anticipates implementation of 25% tariffs by Q2 2025. Unlike previous duty measures, these tariffs would potentially affect all non-U.S. suppliers, including European spruce and Latin American lumber.
- International Emergency Economic Powers Act (IEEPA) tariffs: March saw the brief implementation of blanket 25% tariffs on all Canadian and Mexican goods under the IEEPA, triggering immediate price volatility before lumber and panel products deemed USMCA-compliant received carve-outs. This “Liberation Day” episode highlighted the market’s extreme sensitivity to trade policy announcements.
- Reciprocal tariff review: Another separate track involves the 180-day staff review of potential “custom reciprocal tariffs” targeting countries with large trade surpluses or existing high tariffs on U.S. products. While currently excluding lumber and panel products, this remains a policy wildcard.
The compounding effect of these measures could create a stratified cost structure for foreign suppliers. “The market won’t clear without that supply,” Jalbert emphasized. “U.S. consumption can’t suddenly eliminate its 14 BBF import dependency, even with depressed demand. If tariffs remain stacked on duties, U.S. prices must adjust upward to reflect the new cost floor.”
North American cost curve: reshaping and stratification
The combined effect of rising duties and potential Section 232 tariffs would dramatically reshape the North American softwood lumber variable production cost curve. Fastmarkets’ analysis reveals that duties alone at 34.45% would significantly impact the competitiveness of Canadian operations across all regions. If stacked with 25% Section 232 tariffs in Q2 2025, the cost structure would be even more dramatic.
“This effectively raises production costs for Canadian mills, despite being a potential asset on their balance sheets,” Jalbert explained while walking through detailed cost curve analysis for multiple North American producing regions (BC Interior, US South, US Inland, Quebec, etc.).
For BC producers specifically, the outlook appears particularly challenging. Beyond trade barriers, structural timber supply constraints continue to limit recovery potential. Mountain pine beetle damage, coupled with provincial policy decisions on old-growth protection and conservation, has permanently altered the region’s fiber availability. Annual Allowable Cut (AAC) continues to shrink, creating constraints that would persist even if trade barriers were removed.
Ontario and Quebec operations face a marginally better position on the cost curve but would still experience significant margin compression compared to their U.S. counterparts, particularly mills in the U.S. South. Eastern Canadian mills benefit from better fiber availability but remain vulnerable to the same duty and tariff pressures as their western counterparts.
One intriguing wrinkle in this scenario: if Section 232 tariffs apply to both Canadian and European suppliers, Fastmarkets’ analysis suggests Canadian mills could gain some relative competitiveness compared to European suppliers in the U.S. market, potentially making “European suppliers get the shortest end of the stick, in relative terms.”
The “pivot to pine”: SYP market share gains come at a price
The U.S. South’s position as the low-cost producing region continues to drive structural shifts in North American lumber production. Southern Yellow Pine’s share of total production has increased steadily, a trend that Fastmarkets projects will accelerate under current trade conditions. Data extending back to 1970 reveals how SYP has systematically gained market share – first at the expense of other U.S. producing regions (West Coast, Inland) and more recently capturing share from declining Canadian production.
However, this “pivot to pine” hasn’t been frictionless. The post-pandemic market has seen Southern Yellow Pine trading at unprecedented discounts to Western SPF, frequently reaching $150-$200 per thousand board feet. These discounts reflect both the challenges in species substitution and the supply imbalance created by a decade of capacity expansion in the South coinciding with post-pandemic demand recalibration.
“Southern Yellow Pine has had to buy its way into the market,” Jalbert explained, pointing to price correlation data that shows the breakdown in historical relationships. Long-term correlations between SPF and SYP 2×4 prices traditionally showed highly positive values, but post-pandemic analysis reveals multiple periods with no statistically significant correlation.
This decorrelation has practical implications for risk management, pricing mechanisms, and inventory strategies for both producers and buyers. It also explains the development of the CME’s new SYP futures contract, providing a dedicated hedging instrument for a market that increasingly operates with its own distinct price dynamics.
Despite these challenges, Fastmarkets’ analysis suggests continued SYP ascendancy, as supply fundamentals remain strong. The extensive SYP fiber base and established supply chain infrastructure position southern producers well for further market share gains, particularly if Canadian supply remains constrained by duties, tariffs, and structural fiber limitations.
Demand dynamics: consumption vs. “demand on mills”
U.S. lumber consumption has stabilized around 50 billion board feet (BBF) annually, down roughly 9% from pandemic-era peaks of approximately 55 BBF. This represents the fundamental challenge for producers: adjusting to a “new normal” that sits below COVID highs but remains somewhat above pre-pandemic baselines.
Housing starts, while not booming, have remained “surprisingly resilient” despite higher interest rates and affordability challenges. Single-family construction has been more stable than multifamily, which has experienced more significant softening.
The repair and remodeling (R&R) segment, which Fastmarkets estimates represents the largest end-use category for softwood lumber at 35-40% of consumption (differentiating lumber from engineered wood products that skew more heavily toward new construction), presents a mixed picture. Professional contractor business remains relatively steady, while the DIY segment that drove pandemic-era peaks has retreated significantly. Fastmarkets’ proprietary R&R Index confirms this moderation from COVID-era highs.
An intriguing tension exists in the demand outlook: while rising tariffs and broader economic uncertainty create headwinds for construction activity, potential interest rate relief could drive a resurgence in home purchases. “If we go to an 8% unemployment rate, that’s bearish for housing,” Jalbert noted. “But if we go up to 5.5% from 4.5%, and that’s probably close to our baseline right now, it could be a net benefit to housing if we get 100 basis points of rate relief.”
Operating rates and margin forecast: U.S. advantage emerges
The combination of capacity reductions and stable-to-modestly-growing demand points toward tightening industry operating rates through 2026. Fastmarkets’ demand-capacity ratio analysis projects that 2025 will see the first significant tightening of market conditions in several years, with this trend accelerating into 2026.
Operating rates, as measured by Fastmarkets’ methodology, could reach approximately 82% by 2026—a level historically associated with balanced market conditions and improved selling power for producers. “This represents real market tightening, primarily driven by the supply side rather than demand acceleration,” Jalbert emphasized.
The implications for mill margins vary dramatically by region. For U.S. producers, particularly those in the South, Fastmarkets projects margin expansion beginning in late 2025 and continuing through 2026. However, Canadian operators face a significantly different trajectory, with BC Interior producers in particular seeing margin compression as duty increases consume potential gains from higher operating rates.
The futures market has already demonstrated extreme sensitivity to trade policy developments. In early March, when 25% IEEPA tariffs on Canadian goods were briefly implemented, lumber futures soared, only to collapse days later when lumber and panels received USMCA compliance carve-outs. “Odds of big tariffs getting priced in—and… it’s gone!” Jalbert remarked, highlighting the whipsaw volatility created by policy uncertainty.
For buyers and risk managers, this volatility creates significant challenges. While the cash market has shown somewhat less dramatic movement than futures in response to policy announcements, the speculative component of price discovery has intensified, complicating inventory strategies and hedge execution.
Supply gap analysis and long-term implications
Looking beyond immediate market volatility, Fastmarkets’ analysis points to a fundamental supply gap that must be addressed to meet even modest demand growth. U.S. consumption is projected to increase by approximately 6 billion board feet between 2025 and 2030, driven by the structural housing deficit highlighted in Fastmarkets’ research.
Import reliance remains a critical vulnerability: roughly 14 BBF of the current ~50 BBF U.S. consumption comes from imports, primarily Canada (9-10 BBF), with the remainder from Europe and Latin America. Even with depressed demand, the U.S. cannot simply replace this volume overnight, creating potential supply/demand imbalances if trade barriers remain elevated.
European suppliers face particular uncertainty in this environment. Since 2014, European spruce has grown from a “rounding error” to approximately 4-5% of U.S. market share at its 2023 peak. While European producers have their own fiber challenges, the primary threat comes from potential Section 232 tariffs that could significantly impact their competitiveness.
For market participants, several key factors warrant monitoring:
- USMCA negotiations: The extent and timing of any potential “off-ramps” for Canadian and Mexican suppliers through USMCA renegotiations will significantly impact market dynamics. Fastmarkets’ baseline scenario assumes some relief by H2 2025, though European suppliers could face longer-duration tariffs.
- Interest rate trajectory: Housing demand sensitivity to interest rates could drive a demand resurgence if rates ease in 2025-2026, potentially accelerating the supply/demand imbalance.
- Substitution economics: While SYP continues to gain market share, the significant price discounts required to drive substitution suggest these transitions aren’t frictionless. Technical specifications, treating requirements, and regional distribution patterns all influence substitution rates.
- Capacity investment decisions: With demand expected to grow ~1 BBF annually, capacity investment (primarily in the U.S. given trade barriers) will be essential to avoid structural shortages. However, recent oversupply in SYP may temper enthusiasm for new investments.
“This is in many ways just an acceleration of a process that’s already underway,” Jalbert concluded, referring to the continued market share gains for U.S. producers, particularly in the South. “The pivot to pine and substitution to Southern Yellow Pine has been happening for decades, but trade policy is compressing this transition timeline significantly.”
For an industry that has already weathered pandemic-driven price spikes, subsequent corrections, and persistent margin pressure, the emerging trade landscape promises further volatility—and potentially, for some, opportunities—as North American lumber production rebalances in response to what could be the most significant policy-driven shock since the 1930s.
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