A cooler housing market and high borrowing costs have had an impact
Rising interest rates and building costs have helped contribute to a sluggish pace of home construction in Canada so far in 2023 – and that’s spilled over into a subdued first half of the year for lumber markets, according to a British Columbia-based wood market expert.
Industry consultant Russ Taylor (pictured) told Canadian Mortgage Professional that low prices and weak demand had seen a reduction in mill operating rates, with BC – typically a high-cost producer – bearing the brunt of the downturn.
That’s despite a recent rally partly caused by wildfires that raised fears over future supply and saw prices tick upwards.
“Unfortunately, BC has the highest costs,” Taylor said. “Typically, 90% is pretty good for operating rates [but] operating rates for BC in the first quarter were 66%. So, pretty dismal. And the Prairies and Eastern Canada was 76%, so not bad. They haven’t been hit nearly as hard, if at all.”
With BC’s year-to-date production down substantially this year, it’s likely to come in around 10% lower than prior year in the interior, Taylor said. Coastal production is set to fall by around 5% – partly because of curtailments from wildfires, but mainly because demand has plummeted.
The US, by contrast, is faring decidedly better when it comes to operating rates. “They’re not getting impacted at all by weak prices,” Taylor said, “especially the South. They’re operating as much as they can. Production from the US has increased by 3% in the first three months of this year, and that’s the only region in North America that increased production.”
Lumber and Metal prices are falling (YoY), cement, not so much. pic.twitter.com/6zFWggLKVa
— Richard Dias (@RichardDias_CFA) July 6, 2023
How might prolonged high interest rates impact the lumber market?
Labour shortages and cooler markets are weighing down across the board on efforts to replicate the production levels of 2022, with spiking mortgage rates both in Canada and south of the border also having an impact.
The “wildcard” element where lumber prices are concerned, according to Taylor, is the prospect that rates and access to credit could stay elevated for a prolonged period.
“I have a sense that perhaps that’s going to come back if mortgage rates stay high and there are more foreclosures and then more pressure on the banks,” he said, “or it could be more of a credit crunch that emerges to stall the housing market from any quick recovery.”
One segment that’s accounting for a sizeable share of demand is the DIY space, described by Taylor as a “robust” business at present because many consumers are taking advantage of low prices to carry out smaller projects such as postponed deck renovations at significantly reduced costs compared with the same time last year.
That’s been bolstered by resilient consumer confidence in spite of gathering economic headwinds – although demand in 2023 is still likely to post an overall decline by the end of the year.
“Overall, I’m expecting demand in 2023 to be down about 4-6% where the crunch really happened in the first half of the year,” he said, “and perhaps we’ll build it back a little bit in the second quarter of the year if we don’t have any issues in the fourth quarter.”
What’s in store for the rest of the year in the lumber market?
Current year-to-date lumber prices for western SPF two-by-four, per thousand board feet, are about $370 – and with the breakeven price for BC mills in the low $400s, those producers have had a “horrible” first half of the year, Taylor said.
Still, there’s room for some optimism in the outlook for the future, with a slight rebound potentially in store before the end of the year.
“The good news is that the current price is about $420, and I expect it’ll be much higher over the rest of this month – maybe going up into the mid-to-high 400s. And so finally we’re going to get all regions into a cash-positive situation that we haven’t seen for months of the year,” he explained. “That’s probably going to swamp the market and oversupply the market.
“I figure by August, we’ll see a retrenchment and prices trending lower – but I still think staying in the low 400s, maybe the high 300s, which is not so bad compared to where they were. So the good news for Canadian mills and especially BC mills is we should be doing OK in the second half of the year.”
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