MethodologyContact usLogin
The lumber industry has faced no shortage of volatility. It transitioned from boom to bust in 2018 to 2019 and developed into a bigger boom to bust in 2020 to 2022. The latest Random Lengths Weekly pricing correction shows the Framing Lumber Composite Price (FLCP) plummet from 2022’s highs of over $1,334 per thousand board feet (mbf) to $373 per mbf in the first week of January. Prices have subsequently oscillated around $400 per mbf for most of 2023, a level market participants in a pre-pandemic environment would be more familiar with.
The price correction was triggered by a combination of demand falling off after peaking in the spring of 2021 and supply-side disruptions from the pandemic dissipating as mill headcounts normalized and transportation/logistics shortages ceased.
While 2020 and 2021 were phenomenally profitable years for the industry, since the spring of 2022 prices have collapsed below critical break-even levels for North America’s high-cost supplying regions for dimensional lumber: the British Columbia Interior and US West Coast. Prices dragging along at the cash cost levels for these supplying regions has been detrimental for a market facing much higher converting costs than prior to the pandemic.
According to the latest Fastmarkets North American lumber forecast, softwood sawmill capacity in BC and the US West Coast totaled 11.8 billion board feet (bbf) and 10.7 bbf in 2022, respectively, or about 31% of the industry capacity base. With a substantial percentage of the industry supply base now cash negative, it is no surprise that we have seen a substantial round of closures over the last 12 months, as our wood products team has been warning since early last year when demand starting correcting.
Using mill data compiled in the Fastmarkets mill asset database along with some supplementary analysis from our analytics team, we have mapped the announced closures across North America over the past year. To date, 1.7 bbf of indefinite or permanent closures have been announced across North America since prices began to come back to earth last year. This equates to about 2-3% of the North American softwood sawmill capacity base, marking a notable cut to industry supply.
As is clear from the timelapse, almost all the announced capacity is in the Northwest and British Columbia, the latter accounting for the lion’s share of the announcements. Readers can scroll over the individual bubbles in the figure below to gather information on the mill closure. BC’s total contribution to the capacity losses in this round of cuts, starting in the third quarter of 2022, is about 1.5 bbf, though it should be noted that 200-300 million board feet (mmbf) of these cuts are indefinite rather than permanent closures.
Readers will recall that the province suffered through similar capital destruction in 2018 and 2019 that culminated in over 2 bbf of closures in the province. Much like the current round of capacity cuts, the proximate cause of the shutdowns was compressed margins as prices sank below cash costs for months while demand and supply in North America rebalanced.
However, long-term structural factors are also contributing to the pain. A reduced annual allowable cut in BC stemming from long-term consequences of the mountain pine beetle epidemic and recent harvesting restrictions on old growth land tenures is keeping fiber constrained and driving up sawmill production costs. Duties on Canadian lumber shipped to the US are also impacting profitability.
Fastmarkets North American lumber forecast points to about 1.5 bbf of permanent closures awaiting the market from the recent market downturn, suggesting a few more sawmill closure announcements could be in order even as we see some green shoots of a demand recovery.
Want to know when Fastmarkets expects the market to turn around and how the supply picture is set to expand next year? Check out the latest edition of the Fastmarkets lumber commentary or the North American lumber forecast.