2020 Year End Lumber Market Report - Part 1
Any attempt to adequately describe what has transpired in 2020, may go down in history as one of the more difficult and unbelievable challenges ever. Creating a narrative around what has occurred in the lumber industry this year will most likely sound just as implausible. The emotional and business roller-coaster we’ve all been on this year is as turbulent and out-of-control as one could possibly imagine. Yet, here we are, winding down 2020 in the midst of a global pandemic, a divisive presidential race, the threat of a second wave of economic shutdowns, and all the while, building new homes and apartments like there isn’t a care in the world. If you are like us, you may have even experienced a tinge of guilt because here we are, at breakneck pace when others around the world are out of work and struggling. Yes, it has been a crazy, crazy year. In Part I of our December blog, I will recap the past 11 months in the building and lumber industry. Part II, to follow in a few days, will take a glimpse at what 2021 may look like as we try to crawl out from the shadows of the COVID-19 pandemic.
2020 Revisited
Pre-COVID
2020 started out in January and February like gangbusters. Single-family housing starts registered strong numbers out of the gate. In fact, February registered only the second million unit start month (seasonally annual adjusted rate (SAAR), since the housing recession. Plus, weather was cooperating, allowing construction to keep pace with the strong sales numbers throughout most of the country. Overall starts, when factoring in the multifamily sector, pushed total units to their highest level since the housing meltdown in 2007. And this was FEBRUARY – the slow time of the year. Lumber prices were ratcheting up right along with the surprisingly strong housing activity. Lumber producers were unable to keep up with consumption, and the first nine weeks of 2020 saw Contract Lumber’s Commodity Index jump from $315 to $379, a 20% hike. The housing and lumber markets were red hot and we weren’t even into building season yet. That’s when life as we had known it, changed.
Early COVID
The possibilities of a public health crisis, and its potential ramifications, never entered into my consciousness prior to March, 2020. Most likely, you were no different. Today, our lives’ seem to revolve around daily COVID-19 developments with many referring to it as the new normal. The economy lost over 22-million jobs in March and April due to the pandemic and efforts to contain it. Of course initially, the building industry anticipated significant impacts given the enormity of the pandemic and the state of the economy, fully expecting housing to tank amidst the immense uncertainty gripping our nation. The response from the lumber industry to those expectations was predictable as well. Mills, expecting a large and prolonged downturn, aggressively announced production curtailments, cut shifts, furloughed workers, and even shuttered plants. At the onset, no one knew, with any level of certainty, whether construction projects would even be permitted. Fortunately, it became evident that each state would be making the call regarding how they responded to the pandemic, and most states deemed housing and construction as essential businesses. In response to those declarations, much of the building material supply chain and trade base was allowed to return to action, albeit under strict new guidelines. At that point, you could feel a deep sigh of relieve, certainly within the industry, but more importantly within our country’s economy as a whole. Shuttering such a vital and seemingly resurging component of the U.S. economic engine would have been devastating to the American psyche, confidence, and pocketbooks.
Housing starts slumped in March and April as expected, and lumber prices reacted accordingly. Single-family starts fell by 33% over those two months and our commodity lumber index tumbled by 21% through mid-April. That’s when the resiliency of the housing industry, and the totally uncalculated surge in the DIY market, effectively changed the narrative on the impact the coronavirus would have on housing. No one anticipated the reaction from the millions of sequestered Americans now under orders to work from home. With the support of record low mortgage interest rates, and a little extra cash in their pockets thanks to federal stimulus checks, people decided to shop for new homes, or to make improvements to the ones they had. They toured homes virtually and even made purchases without ever setting foot in a model. They built decks, and fences. They added square footage to accommodate multiple workstations needed to conduct business and continue education efforts. There was a newfound emphasis on home environments and people were willing to invest to enrich their surroundings. Housing starts steadily climbed in May, June, and July with single-family housing leading the way, posting a 47% jump during that time from April’s low. Then, the single-family market hit a new gear not seen in well over a decade. Over the next three months, the U.S. posted over 1 million (SAAR) new home starts each month – the first time housing had three consecutive million-unit start months since 2007. Unfortunately, lumber prices continued to spike right along with housing’s torrid pace.
The record-setting run that besieged the lumber market starting in mid-April was nearly as historically shocking as the pandemic itself. For the next twenty-two straight weeks, the market saw weekly gains, often times in unprecedented $40 - $50 chunks. From the post-COVID low of $301 on April 10th, Contract Lumber’s Commodity Index spiked to $908 on September 11th, an astounding $607 increase, or over 200%. These new levels blew away the past record set in 2018 by more than $370 (69%). The lumber industry was simply not able to intensify production to satisfy demand. In response, prices ran, and lead-times extended. Holes developed across the supply chain on critical construction staples like treated lumber, southern pine dimensional, and MSR lumber. OSB panels also soared to record heights and buyers scrambled for coverage just to keep jobs rolling. Pricing quickly took a backseat. For a snapshot of just how painful this price run was in dollars and cents, 7/16” OSB, the building industry’s most commonly used product, had a reported mill cost (sans freight) of $7.03 per sheet in April. By September, that same 4’ x 8’ sheet of 7/16” OSB cost $21.56 at the mill – if you could find a plant with wood to sell. Lead times pushed out 30-60 days and ship times were consistently delayed. Many orders were booked priced-time-of-shipment (PTS), meaning buyers made purchase commitments without even knowing the price they’d pay. It was an incredibly frustrating and chaotic summer and fall for everyone associated with the construction process, but especially for lumber dealers and distributors throughout the building material supply chain who take a sense of pride in controlling the purchasing process.
Mills struggled, as demand completely overwhelmed supply capabilities. Producers could not overcome the capacity curtailments from the initial COVID reaction. Even as they restarted idled capacity in response to the surge in new orders, and prices rallying to record levels, they were met with persistent labor constraints due to generous unemployment insurance that allowed employees to stay at home and still get paid, and lingering safety concerns that kept workers home fearing workplace spread of the virus. The environment surrounding the pandemic just amplified the challenges sawmills already faced of pulling from labor pools in small rural areas where most mills are located. Plus, many mills had to battle with positive coronavirus cases at their facilities that further hampered production. Timbering operations were also hindered around the country, both in response to the pandemic, and then harvesting restrictions due to an active fire season in the Pacific Northwest. Year-over-year lumber production in North America through the first three quarters was off by only 4% due to rebounding U.S. output and a surge of European imports (+30% Y-O-Y) hitting the market. Canadian imports into the U.S., however, are down over 9% compared to this time last year. The problem, at least through August, was the inability of lumber supply to catch up from the loss of over a billion board feet (18%) of production through May.
2020 Product Line % Increases
In addition to the commodity markets, most other building material products experienced moderate to substantial increases through the third quarter of 2020. Manufacturers, dealing with rising costs of their raw materials, especially if they utilized wood components in their process, like truss plants and engineered wood products facilities, all passed along price hikes during this stretch. In addition, all of these fabricators were also dealing, to various degrees, with COVID-related impacts at their own facilities, in some cases having to completely cease operations.
2020 was also not void of the presence of natural disasters, they just didn’t quite garner headliner status against the public health crisis storyline. With 30 named storms, the 2020 hurricane season would have typically stole top billing were it not competing with global pandemics and divisive presidential campaigns. And while this year’s Atlantic basin hurricane season will be remembered as the most active ever, we were spared cataclysmic levels of destruction, especially to the continental U.S. coastline, due to their intensity. This year’s collective storms will go on record as only the 13th ranked hurricane season in regards to cumulative strength (yes, they are capable of measuring that). Of course, tell that to folks along the Louisiana shore that experienced a record five landfalling storms in a single season. Damage in the Bayou State was centered around more widespread flooding, falling trees, and major power outages, lasting days, and in some instances, weeks. The disruptions to forest products companies and petrochemical plants in the region that supply resins for the industry, were definite hindrances to building material supply and production capacities. Mother Nature’s impact was also felt due to another active wildfire season. According to a National Interagency Fire Center (NIFC) report dated November 9th, 49,149 wildfires have burned over 8.7 million acres this year in the U.S., double the acreage burned to this point in 2019. As mentioned earlier, fires in the Pacific Northwest and Idaho had definite, but short lived, effects on lumber mill production and harvesting activities throughout those regions, and minimal impact on lumber pricing.
Market Correction
Of course, the history of commodity trading, and Sir Isaac Newton, tells us that – what goes up must come down – and even a world-wide pandemic cannot alter Newton’s law. After being out of equilibrium for several months from the unexpected surge in demand and encumbered sawmill production, September saw the lumber market start to rebalance. Initially, mills fell back on their lengthy order files which helped them maintain elevated price levels for weeks, even as resistance grew from lumber buyers and builders, and demand started to fade. Mill order files rapidly diminished in dimension lumber as buyers, fearing significant downside risk, scurried to the sidelines. The downward trend was quite sloppy initially, as market prices for certain commodity items showed unprecedented variation. Some products remained tight while others were deeply discounted. But soon, the downward spiral accelerated and a full-blown price correction was in play.
Over the next eight weeks, the lumber market fell, as retailers and secondaries shifted to an ultra-cautious approach to their purchases, and mill sales slowed to a crawl. From September 18th thru November 6th, Contract Lumber’s index shed $365, or over 40%, moving from the all-time record of $908, down to $543. The decline was all due to plunging dimensional lumber pricing as OSB held on to their record-highs during this correction. While the move was cause for relief, and in some sense – celebration, for perspective, the new level was still above the previous all-time high of $538 set back in June, 2018. Contributing to this supply-demand rebalancing was the improvement of supply conditions, as producers learned how to better handle disruptions stemming from COVID-19, and were able to expand production capacity. Also contributing to the correction from the demand-side, red-hot home center sales declined and thoughts of construction’s seasonality started to kick in to buyer’s conciseness as we headed deeper into fall. The correction, while intense, was relatively short lived.
Late Fall Rebound
Even with supply ramping up and demand moderating, one deterrent from a more significant pullback in pricing was thought to be the very lean inventory levels throughout the lumber pipeline. Dealers and distributors, accustomed to just-in-time delivery, and wary of being burned by sharp price fluctuations, initially let their inventories shrink due to the economic uncertainty of COVID. Then, they were never able to catch-up when curtailed production was unable to keep up with the spike in demand, first from the booming DIY sector, and then from a resurging housing market. With late-year activity in the field remaining robust, the deep cuts in framing lumber prices enticed buyers to replenish and drew most back into the market to make purchases. The volumes immediately firmed the dimension market and by mid-November, order files once again, extended, and prices starting moving to the upside. The only saving grace was that OSB finally started to crack to offset the most recent strengthening trend in Southern Pine and Spruce. Through the November weekly reporting periods, our index hovered around the $545 level with double-digit gains in dimension offsetting double-digit losses in OSB. But in the past three weeks, OSB has quickly turned around and the market has once again exploded. Nine-foot studs and OSB currently sit at all-time record highs, and the southern pine and spruce dimension markets have both posted robust increases to help fuel this late-year rally. Order files have extended well into February.
With the country experiencing another wave of COVID-19 infections moving into winter, we can only hope policy makers choose more focused protection over widespread shutdowns, given the potential economic costs. And with multiple vaccines in the process of rolling out, our environment is changing rapidly. Everything remains in a state of flux as we wind down 2020, one of the most turbulent, exasperating years in our nation’s history. We have been fortunate within the construction industry to have been able to forge tangible progress in such a disjointed year and we greatly appreciate the partnerships that have made this year a success. You will be receiving PART II of our blog within the next few days as we examine 2021 expectations for the housing and lumber markets.
