Expect further volatility before the end of the year
After surging to record highs at the pinnacle of North America’s pandemic housing market boom, lumber prices have taken a tumble in 2022 and recently hit their lowest point of the year to date.
A spike in borrowing costs and a cooler housing market saw lumber futures plummet to a low of $413 per thousand board feet at the end of September, 64% down over their peak this year, with the sky-high prices of 2021 a distant memory.
Higher mortgage rates are “dampening everything” where the lumber market is concerned, according to Vancouver-based wood market expert Russ Taylor (pictured top).
He told Canadian Mortgage Professional that while housing starts were still trending relatively well, those weren’t necessarily the best measure of the construction industry’s health in Canada because starts are currently “dramatically” ahead of completions. “You can’t keep starting homes and not completing them,” he explained.
“Existing home prices were already way too high, so they’re going to have to come off and become affordable, and we’re all going to be waiting for the economy to go through its digestion of a recession until interest rates can move back lower and we can stimulate the market again.”
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While activity is currently being spurred by homebuilders who still have existing order files, the first half of 2023 may see something of a lull until interest rates start to fall, Taylor said.
Lumber prices are likely to settle somewhere in the $450-to-$500 range next year, he added – dramatically lower from where they’ve been during the last two years, but still above the long-term trend of approximately $400.
Still, it could be a bumpy ride until then, with further twists and turns possible as the market continues to contend with various challenges.
Supply chain snarls disrupted lumber shipping and transportation at the height of the pandemic, helping push up costs. While container and trucking rates are down significantly in a sign that supply and demand are moving back into balance, some BC mills are only running three days per week as they’re unable to get trucks or railcars in to transport the wood out, according to Taylor.
“They’ve been down most of the third quarter, and they expect to be down much of the fourth quarter. So there are still issues here and [in] other regions,” he said. “It’s getting better – but nevertheless, it’s another thing that we have to overcome.”
Europe appears to have borne the brunt of Russia’s war in Ukraine where the lumber market is concerned, with European markets in “disarray” because of the high energy costs facing mills.
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A grim fourth quarter could be in the cards on that continent – and while Canada should experience a softer landing, it’s still tied inextricably to what’s going on south of the border in the United States, Taylor said.
“Whatever happens in the US hurts us dramatically,” he said. “We don’t have export market opportunities in Canada – the China market is soft [with] very low prices, [and] Japan is probably steady, but prices are now similar to US prices. They’ve come way off their peak.
“We’re kind of caught now with the US and Canadian markets… As the supply chain starts to improve and mills start to get production up, we’re going to have a little bit of a semi-perfect storm where you’ve got too much production now facing too little demand.”
That’s one of the reasons for a potential volatile period in the offing for the lumber market in the coming months before it eventually settles to a consistent level, Taylor said.
“When you’ve got these mill curtailments and the dealers don’t order very much wood, and then the order files at mills are very short – as soon as there’s a demand increase or a surge, all of a sudden you have a price spike,” he said.
“That’s why I think prices could spike up to $600 pretty quickly until things balance out and move lower. So we’re going to see quite a volatile period – maybe not so much in the fourth quarter, but in the first quarter [of 2023] I think we’ll see a pretty volatile market as everyone tries to position themselves for the spring.”
