By Ted McIntyre

Increased demand, falling supply have pushed softwood costs to new heights. So what’s next?

Entitled “What’s the Story With Lumber and Where Do We Go From Here?,” the Canadian Home Builders’ Association’s January 28 webinar was scheduled to run a full hour. One hundred minutes in, CHBA CEO Kevin Lee wrapped up the last question from online attendees. 

“It goes to show just how much of a challenge this is to our membership, the frustration, the financial challenges,” Lee observed in his closing remarks of the whopping 40 minutes of overtime. 

The interest—and anxiety—are justified. The numbers in the lumber industry have been jaw-dropping. According to RBC Capital Markets, the “random lengths composite” (average market price) for framing lumber was $356 per 1,000 square feet in 2019. As of mid-February 2021 it was $1,002. 

While that’s meant a boon to the North American forestry industry, it’s been stress-inducing for Canadian builders and contractors as they attempt to secure supply and recalculate costs. 

And what has it meant to the bottom line for consumers? According to a December 2020 report from RBC Capital Markets analyst Paul Quinn, the skyrocketing lumber prices have increased the cost of a typical 2,500 sq. ft. new home by $30,000. And prices have only climbed since that report was created, Quinn notes.

With contracts that have been locked in, that’s meant builders and contractors have had to swallow the added costs, with some barely breaking even on those projects.

“And it’s not just lumber, it’s (the associated) insulation increases, drywall board increases, etc.,” explains CHBA President John Meinen. “I’ll give you an example with a recent project. For my first block of six townhouses, the trusses were $26,000. The second block of six was $36,000. The third block was $46,000. And I am building a new 2,800 sq. ft. home right now and I bet if you took my square-footage price, I’d be close to $40 a square foot for labour, trusses and wood. It would’ve been $26 a year ago.”

While Meinen has raised prices to offset higher costs, it hasn’t dampened demand. “I’ve put those townhouses up $40,000-$45,000 since April,” he says, “and I still can’t keep them on the shelf.”

SO WHAT HAPPENED?

While “the perfect storm” has been an overused descriptor since George Clooney’s Hollywood epic, it is an apt analogy for what transpired in the residential construction industry. 

“There was already pent-up demand,” observes Lee. “But I think what nobody saw coming were the savings that resulted among those who were able to keep their jobs and their (ability) to move to single-family housing. So there’s been a large COVID effect that’s changing buying patterns. How long that will continue remains to be seen. But if work-from-home stays in place and people can continue to live further away from town centres, construction will see an additional bump.”

The numbers bear that out. November 2020 seasonally adjusted starts in Canada were 246,000, compared to 205,000 at the same time in 2019, with a total value of residential building permits of $5,982,791 (up 42.8% year-over-year).

Lack of entertainment and travel, meanwhile, ignited the home reno market. 

But nothing was a greater accelerant to increased demand than federal governments dropping interest rates, particular the 0% rate in the U.S. That spurred another level of housing demand on a front that was already experiencing a red-hot residential market.

“One of the things that gets missed is the housing mix in the U.S.,” Quinn indicates. “Over the last number of years, the percentage of single-family (in residential construction) had been in the high 60s. Now it’s solidly in the 70s, and that single-family start uses three times the lumber and OSB (oriented strand board) as a multi-family start.” 

“With single-family stealing share from multi-family, that’s good news from a lumber consumption (standpoint), as a billion board feet of additional volume is consumed with each 100,000 of additional housing starts,” says Michael Almond, G.M. of SPF Sales North America for Canfor, an integrated forest products company based in Vancouver.

SUPPLY CHALLENGES

At the same time that demand has been spiking, supply has shrunk in B.C., which produces roughly half of Canada’s lumber. 

“For our western Canadian operations, the story’s been all about the transition from the Mountain Pine Beetle epidemic,” noted Almond during the OHBA webinar, in reference to the ongoing pest outbreak that started in B.C. in the early 1990s and has affected more than 18 million hectares of forest. University of British Columbia research recently estimated that the loss of log supply in B.C. is the equivalent of 9 million single-family homes of trees, Almond noted, and the wildfires of 2017 and 2018 only compounded the problem. “The production capacity is nowhere near the same level of 2006, 2007,” he said. “We’re down 3 billion board feet (since then).”

Part of the problem was that producers “didn’t really recognize the buying signals” brought on by the pandemic, suggests Quinn. “They did shift production, and it came up rapidly in May and June, but we were already behind the eight ball. So last year was a very difficult from a supply standpoint trying to meet market demand.”

Supply will gradually improve, but don’t expect Canadian suppliers to ignore the 800-pound gorilla south of the border. “There are 1.7 million housing starts in the U.S. compared to around 200,000 here in a good year,” Lee notes.

“There’s 50 billion board feet of demand from the U.S.,” Almond adds, “(and) we want to be loyal to the customers that have gotten us to this point.” 

Despite Canadian suppliers eagerly feeding the beast below the border, Quinn contends that local clients have been anything but ignored. “Canada is getting a disproportionate share of lumber right now versus consumption,” Quinn maintains. “So I’d say Canadian producers are doing a more than adequate job of servicing Canada—although I understand the frustration (of the construction industry).”

But are builders being gouged amid this heightened demand? “The lumber industry lost money essentially for eight straight quarters, so we’re profitable today. But it’s been a long road to get to this point, and (the level of demand) was unforeseen,” counters Almond. 

Quinn puts it diplomatically: “Right now, profitability is such a huge incentive, trying to gain as much as they can.”

OVERCOMING HURDLES

The damage for builders and contractors has entailed significant delays, cost overages, lots being pulled from the market, pre-sales being cancelled or postponed, as well as some strained business relationships, says Lee. “It’s definitely making it hard to do business for builders and renovators, and slowing much-needed housing supply from coming online.”

Temporary casualties may include the home building industry’s tall-wood strategy. “We can’t move to 12-storey wood if we can’t get the prices and supply under control,” says Lee.

So what steps is the CHBA taking to address the issue? “One very important thing we’ve done is to keep this issue front and centre in the media, not only bringing awareness to the government but to consumers, who need to understand why the cost of their home or the renovations is going up so much,” Lee notes.

Transportation is also front and centre, particularly since 80% of the mills in Canada rely on one railway. “The federal government must work with the transport industry to address bottlenecks and service issues for rail, as well as driver shortages and increasing insurance costs in the trucking sector,” Lee says. “The lumber industry has had to pivot, using much more trucking than usual due to the rail disruptions. It’s critical that governments do all they can to have Canada’s transportation system operating safely and at 100%.

“We’re also engaged at the federal level with the government, lumber industry, constituent associations and the National Association of Home Builders in the U.S. to keep abreast of the situation as it evolves and to pursue solutions,” Lee continues. “Through the summer and fall, CHBA advocacy focused on getting the supply chain up to 100% operational capacity. In terms of access to more fibre, while that is provincial jurisdiction, Quebec is increasing its allowable cut, and there is talk that Ontario may look to do the same.”

The difference between harvested forests in Canada and the U.S. is a notable one, explains Forest Product Association of Canada (FPAC) President and CEO Derek Nighbor. “For FPAC members, 94% of lands we’re operating on are provincial government lands, meaning there will be many challenges in dealing with indigenous population, protecting ecological integrity and biodiversity, etc. But it’s the opposite in the U.S., where over 80% is private.” And that latter stat means a formidable lobbying group protecting American interests, Nighbor notes.  

“Forest management a lot like rezoning in a neighbourhood, where anybody in the area that has a stake or a right will all feed into the process,” he suggests. “The problem is that the federal government continues to creep into provincial government space with their carbon policies and conservation policies. Those are all well-intended and things we mostly support, but the challenge becomes the duplication and overlap and confusion that some of these federal moves have in Ontario communities. The message to the federal government is that on anything related to land use, there needs to be greater collaboration and coordination with the provinces.”

So with Canada seriously challenged by supply issues, “the opportunity is here for us to have a call to action to our federal and provincial governments to think about self-sufficiency—what we can do more sustainably to leverage the power of our resources,” Nighbor says. “That certainty around supply and accessing the land base in a sustainable way is the top area where our forest industry, retailers and builders can work together.”

Lest anyone worry about depleting our forests in the process, Nighbor reminds that “last year we harvested less than a half of one percent of our forests in Canada—planting two for every one we harvested in most jurisdictions, or even three-to-one.”

WHAT’S NEXT?

For now, however, stress levels are increasing within the industry. Lumber mills, for example, are still running about three months behind on orders, CHBA notes, particularly on oriented strand board (OSB) and plywood.

“Mills in Canada are operating basically at 100%, but the ongoing housing high demand, both in Canada and the U.S., has kept lumber prices at unprecedented highs,” Lee says. “It will indeed likely be at least a couple of years before they return anywhere near what the prices were prior to the pandemic. In the meantime, it will be critical that the full supply chain stays operating safely and at full capacity, and that transportation issues be avoided and overcome. Ideally, more milling would come online and there would be increased access to fibre, and there is talk of that in both Canada and the U.S.”

Although an RBC report forecasted random length composite to average $575 for the coming year, significantly lower than where it’s at right now, Quinn admits that “prices have been a lot higher than when we put this together, so our forecast probably has to come up.”

At the end of the day, the one who will feel the brunt is the consumer seeking renovations, not to mention the potential buyer, notes Meinen. “The income level of the consumer has not gone up in proportion to what is happening in the economy, and with increased housing prices I really feel sorry for the young people trying to get into the market.”

“For houses sold before lumber prices went up, the increased costs are dramatically eating into margins,” Lee points out. “For builders selling since the prices went up, the increased cost of lumber has to be reflected in the home sale price, which is unfortunate for consumers. But in most cases housing demand is so strong that sales can still be made, in part thanks to the low interest rates right now.”

What can builders do to weather the storm? “I know there are folks out there trying to ramp up supply to make sure they can meet their needs,” says Liz Kovach, president of the Western Retail Lumber Association. “But part of managing expectations is that if you haven’t yet submitted those projects that you’re going to be working on, it’s really important to be doing that with the dealer community right now.”

Although the market is robust, Quinn has a cautionary note for the near future. “COVID-19 has had a material impact on small businesses and employment, and once government subsidies and assistance ends, there’s going to be a wave of hurt,” he says. “It seems like the government wants to keep stalling it, but there has to be a (day of reckoning). It’s not like the economy has created a ton of value through this.”

But for now, the residential home building industry should get used to another two seasons of higher costs, Quinn suggests. 

“At the back end of 2022, there will probably be another 2 billion board feet of (North American lumber) capacity coming on,” he says. “That might slow down the pricing, although they will still stay very high in a historic sense. In our estimation, it’s going to be two to three years before we get back to a balance of supply and demand.”

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