The recent declaration of a state of emergency in British Columbia due to ongoing wildfires in the region’s forested areas caused lumber futures to rise higher than they have in over a year. The spike comes as concerns are being aired on how the wildfires may reduce wood supply in the country.
The region produces the bulk of Canadian lumber exported to the United States. Still, suppliers are worried that supplies sent over the border will dwindle as the fires have thrown a wrench into the supply chain and have curtailed transportation.
On July 22nd, Canadian lumber was up by 7.7% at the Chicago Mercantile Exchange. Lumber due for delivery this September settled at $584 per thousand board feet, posting a gain of $42. While this surge is still lower than the peak price the commodity hit in May by over 60%, it stands as the biggest advance for an active contract since the pandemic hit last year.
Throughout 2020, people saw the pandemic-driven lockdowns as an opportunity to build new homes or remodel existing structures, fueling a boom in home construction. While this enabled lumber futures to surge throughout the latter half of 2020, these fell to an eight-month drop last week as demand for lumber eased and suppliers replenished their stock.
Analysts say that replenished stocks and an overall decrease in orders will keep any price increases in check.
Feeling the fire
Transportation is a key issue where lumber supplies are concerned, especially after two of British Columbia’s chief railways sustained damage to their tracks following a fire last June 30.
These railways have been the region’s primary means for ferrying exports to Vancouver and the fires have caused congestion at the city port. While lines have been repaired, the ongoing spate of fires continues to hinder travel and the delivery of goods by rail.
Industry watchers say that the lumber market is not turning bullish, wildfires notwithstanding. In fact, Mark Wilde, an analyst who covers the timber and wood products scene for BMO Capital Markets, believes that the market now has to deal with an overstock of lumber at mills on both sides of the border after a full year of struggling to fill their inventory. He cites the recent drop in DIY renovation – a 40% reduction as of the end of Q2-2021 – as one particular reason for the current glut in the market.
Greg Kuta, CEO of Westline Capital Strategies Inc., believes that sawmills now face the challenge of selling wood they cannot transport and will need to find other ways to clear out their inventory.
As he puts it, lumber mills “need to see takeaway increase dramatically in the secondary, end-user markets and export markets to right the ship in cash.”