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.
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.
WATCH | Why high lumber prices are going to make everything more expensive:
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. 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.
The see-saw went so far in the other direction 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,” he 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.”
TD analyst Sean Steuart also thinks that more shutdowns in Western Canada’s lumber industry are coming.
“We believe that production curtailments in this region are inevitable, but they have been slow to arrive so far,” he said in a note to clients.