US home building has grown, especially since the COVID-19 pandemic in 2020, at a balanced pace, and the lumber producers have slowly risen to reach the demand received from the constructors. However, the gap in the supply chain exposed during peak pandemic time is on the verge to become an issue for the longer term that keeps pressure on the US lumber prices. The lumber shipments from Canada to the United States (an extremely vital chunk of the supply to the US) were hit by around 20% in 2020 April. The production levels, however, are unlikely to return due to factors such as:
- The reduction in the AAC (Annual Allowable Cut) in British Columbia has also reduced the volumes in production in the same region. The Annual Allowable Cut figure right now stands at 3.1 million cubic meters every year (as per February 2012), set periodically. The new Annual Allowable Cut base case is at 2.65 million cubic meters every year, at around a 15% reduction.
- Several Canadian forests have recently undergone distinct changes in the past decade because of the MPB (Mountain Pine Beetle) infestation that killed millions of acres of trees. The salvage logging of such trees has ended, and the available supply has tapered because of it.
As the industry moves forward, the minimal supply of lumber from Canada, coupled with the issues with log supply in the US Pacific Northwest, has set the stage for European lumber producers to get an option to play an important role as suppliers to the construction industry of the US in the future.
Speaking at a Webinar hosted by Timber Exchange, Russ Taylor (CEO, Russ Taylor Global) mentions, “The supply chain was so finely balanced before the pandemic. We don’t realize all the work that goes into it, and now it’s in chaos. So, I think it’s going to take some time to correct itself.”
To understand more deeply what he meant, for now, let’s take a look at how these markets responded to the events that happened during the COVID-19 pandemic of 2020.
As compared to the rest of the world, Swedish sawmills are known to be quite flexible as they are accustomed to doing business with countries that have sufficient demand. In 2Q2020 when the Novel Coronavirus hit the world, the Swedish sawmills almost went double on their lumber exports to the United States, which, when calculated, comes at around 5% of the complete Swedish production of lumber. Having said that, the domestic deliveries decreased by almost 5% in the same year. The construction trade in Sweden, however, has been stable, but the industry overall is still coping with the reduced demand from trading partners and a few segments. As a result, the total production and exports have fallen around 15%. Due to the demand decrease, the log stocks at the sawmills have stayed thin so that it remains flexible, even amid a rapidly changing market.
As a place that didn’t fall in the list of lumber exporters to the US in 2020, because Finnish producers focused on the stable demand from the Northern Africa/Middle East, Japanese, and European markets, Finland has come a long way. The production of softwood lumber through 3Q2020 was down by around 14%, and the plywood production saw a 19% dip. At this point, you should also note that the Finnish paperboard and paper production also went down to a large extent. Having said that, the long supply for Finnish sawmills have been increasing slightly over the past few months, and they are currently in a decent position to benefit from the high prices in the US.
2021 is expected to see the peak of the colossal number of beetle-killed spruce across the European forests. The next few years would see salvage efforts of several million cubic meters of dead timber as it can rot much quicker than any other species found in other parts of the world. The recent disputes between China and the US due to trade have brought to the fore an opportunity for European log exporters. Germany, however, benefitted from the situation and thus have been exporting to China massive volumes of salvaged timber. The remarkable sawn log export increase didn’t impact the domestic sawmill consumption, though. Germany, standing today, still manufactures a large amount of lumber and has doubled its exports to the United States.
Since 2020 August, when the global markets have been driving the demand, the lumber and construction markets in the Baltic States have been active, quite unusually. Similar to what the situation has been in Sweden, the exporters in the Baltics have sky-rocketed their lumber exports to the United States to take advantage of the historically high prices and slowly meet the strong demand.
The BREXIT political development is also responsible for the strong increase in the demand for lumber from the UK. The British importers have placed a huge number of orders nearing the end of 2020 to go past the trade rule changes that were to come into effect in 2021 January. The log prices of Latvia and Estonia have increased around 5%, but the demand for sawmill byproducts have decreased, thereby negatively impacting the profitability.
At the same webinar as referred to above, Russ Taylor goes on to state, “The long-term trend is about 1.5 to 1.6 million housing starts. We’ve been below that level since 2007 and once crossed it briefly in 2020, and then finally this year, we’re going over that threshold. So, there’s a pent-up demand in the US for new homes, existing homes, and the pandemic has created this demand” This has, most definitely, presented continued opportunities for the manufacturers, thereby leaving a mark on the European lumber prices as well.
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