The price of lumber rose at its fastest pace in more than a year on Thursday, after timber companies warned that wildfires in Western Canada are hurting their business.
The price of a lumber futures contract jumped by more than 10 per cent, triggering circuit breakers designed to halt trading. Late in the day on Thursday, a contract for 1,000 board-feet of lumber was going for $647 US, up by more than $60 from the previous day's close.
Prices are spiking because lumber companies in B.C. and elsewhere are scaling back operations because of wildfires.
Vancouver-based Canfor said it will produce about 115 million fewer board-feet of product this quarter because wildfires have damaged the rail network on which it depends. CN lost the use of at least one rail bridge on its line into Vancouver, and CP is facing similar bottlenecks.
"Canadian rails will ... face pressure from wildfires in British Columbia as volumes may take several more weeks to fully recover," Bloomberg Intelligence railway analyst Adam Roszkowski said in a note to clients on Thursday.
That means it's harder to move just about anything to market, so Canfor is going to take its foot off the gas.
Lumber prices soared in the pandemic
Canfor's anticipated production drop of 115 million board-feet of wood is less than 1 per cent of what the industry normally cranks out every quarter. But Bank of Montreal analyst Mark Wilde said he expects more companies will also have to reduce production in the next little while.
"We expect more announcements of reduced shifts/hours over the next two to three weeks," he said in a note to clients Thursday.
Like many industries, the lumber business slowed down at the start of the pandemic as workers were sent home and facilities idled. But demand for lumber unexpectedly exploded, mainly due to booming demand for home renovations.
At one point in May, the price of lumber hit an all-time high of more than $1,600 US per 1,000 board-feet or about five times what it was at the start of the pandemic. Builders reported that higher lumber prices were adding as much as $30,000 to the cost of constructing a standard home and lumber yards across the country were selling out.
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But things changed in a hurry. Those astronomical prices caused demand to crater once again, leading to inventory piling up at lumber yards as people shelved their do-it-yourself construction plans.
"People were holding off unless they really needed that wood right now, so there's a bit of pent-up demand," is how Kéta Kosman, publisher of Madison's Lumber Reporter, described it in an interview with CBC News.
Big box retailers in the U.S. such as Home Depot have reported that demand for lumber is down by almost half since May.
"After a year of chasing inventory, the market is now struggling with bulging inventories at many mills in the U.S. and Canada," Wilde said.
So a lack of supply pushed up prices in May, which led to a lack of demand from consumers in June. Now the pendulum is swinging back toward another perceived supply problem, Kosman said.
"When there's fires like this, it creates a perception that there will be a shortage of supplies and there is a reaction," she said. "When we have these big fluctuations over this year where the price is so sky high, I do think it's possible that the correction down may have gone too far."
Indeed, the correction was so swift that Wilde said a number of B.C. sawmills were likely recently selling lumber for less than the cost of production.
"At those levels, some B.C. mills may need a snorkel," Wilde said of when the price dipped as low as $435 US. "It would be crazy to simply return all that cash to the market by overproducing during a weak market."
Hurricanes playing a role, too
Kosman notes that wildfires aren't the only way Mother Nature is impacting the lumber market. On top of the fires in western North America, violent storms in the East are looming, too.
"The fires in the West right now are a month earlier than we would normally have. And the storm season in the south and in the East Coast is two months earlier [than] would normally be," she said. "So that's a lot of potentially rebuilding and a lot of ordering of plywood first to board up the windows and then for reroofing."