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Sawmills will bounce back by fall, market watchers predict

American housing market expected to remain robust on strength of millennials
stacked-lumber

Sawmill workers hit by curtailments at Canfor and Conifex should be back on the job in fairly short order, two market watchers are predicting.

Canfor said Tuesday it will run all but one of its B.C. sawmills at 80 per cent capacity starting next week while the Conifex operation in Mackenzie is in the midst of a two-week shutdown in the face of flagging lumber prices.

North American lumber prices hit all-time highs of more than US$1,600 per thousand board feet in May, driven by a mismatch in demand and production, but have since fallen below US$500 per thousand board feet.

But Keta Kosman of Madison's Lumber Reporter said it could be just a matter of weeks before the market has bounced back to a level where sawmills are making money again and pointed to the most-recent data from the U.S. housing market, a key driver of lumber production in B.C., as the reason for her optimism.

"The starts are down a little bit but the permits are up," Kosman said and added permits are typically secured about two months before work on a project begins.

"That's really unusual, people don't usually break ground on a house in October. This says there is still momentum for building which for sure will materialize at the beginning of next year.

"So if they take a little bit of downtime right now and are able to ramp up in, let's say four weeks and run for another four weeks before winter really sets in that'll put them in a good position at the end of this year." 

She said mills are taking a breather while building up an order file and letting a backlog of inventory decline.

Once the price rises into the $600 to $800 range, they should return to being viable, Kosman said, and added that her sense is they prefer to see a price closer to $600 and be able to sell at volume rather than at $800 and not sell as much.

Paul Quinn, an analyst at RBC Capital Markets, said the market should "normalize in the September period."

"Fundamentally, the market is still quite tight and we should have a decent run at lumber prices into '22, next year," he said.

As it stands, Quinn said the break-even price on western spruce, pine and fir is in the US$525-$550 range, "and right now you've got prices down at $475."

He also noted that, due to the way stumpage works, break-even could rise to $550-$575 by October.

Both Kosman and Quinn said the curtailments are partly seasonal.

"Prices, they usually get pretty quiet in the summer and then they pop back up in September as people want to finish their projects as the winter sets in," Quinn said.

Kosman said more and more American millennials are entering the housing market as they enter their third decade and noted they outnumber the previous generation of baby boomers. While they're not as interested in single-family homes with yards, she said the three-storey townhouses they prefer still add up to a huge volume of wood, which Kosman said bodes well over the long term.  

The current price is still above the 10-year average of about US$350 per thousand board feet. But B.C. producers face some of the highest operating costs in North America, according to the Council of Forest Industries.

John Rustad, the Opposition B.C. Liberals' forestry critic, echoed the concern and pointed go government red tape and a cumbersome method for assessing stumpage in B.C. as the prime culprits.

Rustad expressed support calculating stumpage on a monthly basis, as is done in Alberta. In contrast, he said B.C.'s is based on a 15-month average for lumber prices with a three-month delay.

"Even if lumber prices stay down, we're going to be in for high stumpage for the next 12 months," Rustad said.

He added that producers need cash to rebuild their mills to process other types of timber as the stock of beetle-killed pine runs out.

"We're not going to see the capital investment that's needed without having a competitive cost structure," Rustad said.

It's a concern Rustad has raised in the past. In May, a B.C. Ministry of Forests spokesperson replied that ministry consulted with industry representatives about moving to monthly adjustments and, "at this time, the general consensus was to stay with the current system of quarterly adjustments."

West Fraser remains the outlier. As of Thursday, the company had not yet imposed any curtailments.

- with files from Nelson Bennett, Glacier Media