Tried to get a 2x4 recently? There’s nothing easy about it, and when you succeed, well, it’s just about worth its weight in gold. Prices are sky-high, and there’s no relief in sight. To make matters worse, this isn’t the off-season; we’re heading straight into peak construction time. If COVID-19 has wracked the economy and we’re still trying to recover, why is this slice of the market white-hot? And is there an end to the relentless “up”?
Canadian prices for wood products seem out of control. Domestic softwood lumber prices are up 48% in the past three months and are currently double what they were at this time last year. Plywood and veneer products aren’t as strong—thankfully—but let’s face it, they’re up 74% from year-ago levels. Other wood products aren’t facing the same squeeze, but they aren’t nearly as critical to construction. Builders are scrambling to get their hands on enough material for the season, and new homebuyers are having to eat the additional costs.
It’s not just a Canadian thing. Stateside, costs are also getting out of hand. Softwood lumber is up 83% from year-ago levels, and monthly increases through March aren’t letting up. Similarly, plywood is up 53%, and even hardwood is getting into the mix, now up 27% and seeing alarmingly intense monthly movements. Millwork is more stable, but with input prices soaring, it won’t be far behind. So much for hopes that new home or reno prices are stabilizing. The National Association of Homebuilders pegs the average hike to new home building costs at US$24,000.
Things aren’t as dramatic in the Euro Area, but they may just be a bit behind the trend. Through February, monthly gains strengthened, and year-on-year prices for sawmill products have gone from flat last October to an increase of 5.3% in March. This has been powered by recent monthly gains, which at annual rates have zoomed up to the 20% level. Not comforting. Plywood and veneer products are lagging this movement, but the current trajectory suggests catchup is on the way.
Is any of this affecting international trade? Good question. A large share of global shipments requires crates and pallets. Prices here are on the rise as well, although detailed industry data can be difficult to get. Eurostat collects data on wooden containers, and at first blush, things look tame. However, annualized prices rose by more than 13% in both January and February. Exporters say that this has continued through April, adding to already-soaring shipping costs. No wonder business has inflation worries.
North American supply has been crimped by labour constraints, and fibre shortages that have been exacerbated by previous pine beetle infestation of large tracts of old-growth land.
At the same time, housing activity is a key driver of these price pressures. Starts of new dwellings hit a crazy pace in Canada during March. Long-term demand is roughly 185,000 starts annually. The March number tipped the scales at an astonishing 335,000 units, annualized. That followed six months where average activity was 253,000 units. These outsized numbers might make some sense if we were making up for past shortfalls. No such thing; but for a momentary dip in 2008-2009, we have been in excess since 2002.
Thankfully, a similar surge in the United States is more sustainable. Chronic underbuilding in the post-global financial crisis period created a groundswell of pent-up demand. Only very recently have housing starts moved above the long-run marker, averaging in the 1.6-to-1.7-million unit range—and in our view, they can stay there for some time. This suggests no imminent relief for wood prices. In fact, the decade-long lull in U.S. homebuilding shuttered sawmill capacity—some of which can’t come back. Gearing up to meet current and future demands is going to take time, so we can expect that near-term prices will be stubbornly high.
What’s strange about this is that it shouldn’t really be happening. The job losses, business closures, hits to income and uncertainty brought on by the pandemic should have shut down large, lumpy purchases, like housing and renovations. That’s typical in any recession; well, not this one.
Why? Well, interest rates are low. But then again, they usually plunge in a recession. How about confinement—we’re so cooped up that in frustration, we’re buying second homes, fixing up current ones or just moving out. Well, recessions also coop people up, and people would like to do all these things, but they don’t have the cash.
