Softwood lumber market remains volatile

The U.S. lumber industry faces continual volatility, with major market swings a reality for those working within the industry. The interplay between domestic and foreign trade contributes to an unpredictable lumber market. Additionally, macroeconomic demand factors, such as U.S. housing starts, have a major effect on the market.

Demand for softwood lumber

New housing starts, as well as housing repair and remodeling, are two of the largest drivers of lumber demand. The “Housing Starts” and “Leading Indicator of Remodeling Activity” charts below illustrate historic and forecasted demand for each of these U.S. segments. The first chart traces activity associated with annual housing starts dating back 35 years to 1980. The volume of starts has been up and down across the years, as would be expected. However, the 2009 recession prompted a significant decline in starts and created one of the most challenging periods for the residential construction industry.

Housing starts regained momentum in 2013, and residential construction within the U.S. is forecasted to increase 12.7% year-over-year in 2015. Industry experts predict it will increase by another 8% in 2016.

Even at these expected higher levels, housing construction will still lag historic levels achieved between 2003 and 2006. The “normal” new housing demand level continues to be questionable, but recent studies peg this number to be around 1.4 million U.S. housing starts. While forecasts indicate housing demand will rise through 2018, some industry analysts are predicting a cyclical downturn in residential construction as early as 2017 or 2018.


Source: U.S. Department of Commerce, NAR, and Wells Fargo Securities, LLC

Conventional mortgage rates once closely correlated with U.S. housing starts. Minor changes in mortgage rates resulted in commensurate changes in housing starts. However, since the 2009 recession, this correlation has completely collapsed. While mortgage rates have been extremely attractive, hovering between 3% and 4% in the past few years, even a 50-basis-point swing in the rates now has little influence on housing starts. While a number of macroeconomic factors disrupt the mortgage and housing relationship, mortgage interest rates no longer directly correlate to housing starts.

Remodeling activity is the second-largest consumptive use of softwood lumber in the U.S. According to the Harvard Joint Center for Housing Studies, expenditures for housing have been growing steadily since bottoming out in the first quarter of 2011, as shown in the “Leading Indicator of Remodeling Activity” graph below. The most recent 2014 and 2015 figures indicate a slowing in the overall growth rate for remodeling expenditures, although still depict a positive gain.


Source: Harvard Joint Center for Housing Studies

Supply of softwood lumber

Production overcapacity currently exists within the softwood lumber industry. Hundreds of sawmills are spread across North America. Very few new mills have been constructed in recent years, and a number of older mills have been closed. Even with considerable mill consolidation, the industry remains relatively fragmented, and existing mills are operating under capacity. In 2014, the largest lumber producing company in North America represented less than 10% of the total volume of lumber produced. The largest three lumber producers combined manufactured less than 25% of the total lumber produced.

During peak housing construction and real estate sales in the mid-2000s, North American lumber production totaled approximately 75,000 million board feet (MMBF). By contrast, when new housing construction hit bottom in 2009, total lumber production fell to about 42,000 MMBF, a decrease of nearly 45%. During this time, numerous mills closed and the remaining mills operated at a greatly reduced capacity.

As shown in the “North American Lumber Production” chart below, total North American lumber production for 2014 was 56,295 MMBF, with U.S. mills producing 31,649 MMBF (56%) and Canadian mills producing 24,646 MMBF (44%), of the total. The practical sawmill capacity utilization in 2014 was estimated at 83% for U.S. mills and 79% for Canadian mills.


With the exception of some minor timber species or specific lumber grades, an ample lumber supply should continue to be available to the marketplace. While an oversupply condition can occur when demand or markets rapidly decline, today’s lumber production companies remain in tune with market fluctuations and are able to quickly adjust production to keep lumber inventories in balance with sales.

Lumber pricing

For the most part, softwood lumber is a commodity. Many timber species and types of lumber exist, and there is a variety of lumber market niches. However, softwood lumber is a commodity because it represents the greatest volume of lumber sold. Gross margin management and low-cost production are key variables governing the success of a single softwood lumber producer and the industry as a whole. Therefore, application of technology and other innovations that positively affect mill efficiency and recovery, and minimize production costs, contribute directly to profitability.

The softwood lumber industry has long experienced price volatility. The “Framing Lumber Composite Price” graph below illustrates the historic composite price of construction framing lumber. Short-term price volatility within any given year is visible, but the drop in price during the 2009 recession, which has since been followed by price recovery, is notable.


For lumber producers, log cost is the largest component of cost of goods sold. Recently, within the U.S., log costs have been very high in the Pacific Northwest due to log export competition. However, log costs in the Southeast have been at a near-historical low-point. This is mainly due to an abundance of timber that accrued during the recession when sawmill consumptive rates were lower. Also, the relatively minor volume of log exports from the Southeast has not been much of a factor for the overall market. While Pacific Northwest mills are realizing compressed margins, Southeastern U.S.-based mills are experiencing comparatively excellent margins.

Timber export

Not all of the lumber produced in North America is consumed within North America, so the export market is very important to the industry. In 2014, the U.S. exported 4.3% of its total lumber production to markets other than Canada, primarily China and Mexico. Canada exported 20% of its total Canadian lumber production to markets other than the U.S., primarily China. Excluding cross-border trade between the U.S. and Canada, in 2014, North America exported more than 11% of its total lumber production.

The “U.S. Exports to China” and “Canada Exports to China” graphs illustrate the trends in timber and lumber exports to China, depicting both logs and lumber. (Note that the U.S. data is presented in volume, and Canadian data is presented in C$.) The U.S. has a much higher export trade to China of un-cut logs compared to cut lumber. The inverse is true for Canada, because the preponderance of timber ownership in Canada lies with provincial governments, which are not inclined to export logs and associated sawmilling jobs. Regardless, there has been tremendous growth in the timber export trade with China, which rose from nearly nothing just seven years ago.

Nevertheless, year-to-date timber trade of both logs and lumber with China is significantly lower for both the U.S. and Canada. Chinese trading patterns are difficult, if not impossible, to predict. Many end-uses are government-mandated (e.g. Chinese housing construction), which can literally turn on a signature. As a result, log prices in the Pacific Northwest are beginning to decline as Chinese log demand wanes, and Canadian lumber once designated for China is now being sold into the U.S. Naturally, this affects both U.S. lumber supply and U.S. lumber prices.



Without question, foreign exchange influences timber trade. Since January 2013, the Canadian dollar to U.S. dollar exchange rate has risen from about CA$1.00 to a March 2015 peak of CA$1.27 to the U.S. dollar. From March 2014 to March 2015, the euro to U.S. dollar exchange rate has risen from 0.72 euros to 0.94 euros. While these changes in foreign exchange have created a negative effect for U.S. lumber exports, they simultaneously make imported Canadian and European lumber more financially attractive to the U.S. market.

Lumber imports

Although the U.S. lumber market is notoriously volatile and often suffers from overproduction, it is often the most robust and lucrative lumber market available to global producers. For example, of the total volume of lumber produced in Canada in 2014, nearly 50% was exported to the U.S. In 2014, the U.S. imported roughly 29% of the lumber consumed within the country, with nearly 96% of imports coming from Canada.

Ten years ago, during the height of housing construction in the U.S., the percentage of imported Canadian lumber was close to 35%. The percentage declined during the recession due to market compression and overall constriction within the industry. At this time, mill closures occurred on both sides of the border.

Timber industry outlook

Even after a slow start in 2015, U.S. housing starts along with overall U.S. demand for lumber is forecast to improve for the remainder of the year. But, what about the price of lumber?

Unfortunately for the timber industry, lumber prices declined each month through April 2015. In fact, specific to the framing lumber composite price, the first quarter of 2015 witnessed one of the worst first-quarter declines, and lumber prices, on average, are 12% lower than in December 2014.

Chinese demand for both logs and lumber imported from North America has waned. However, many experts consider the slowdown temporary, given Chinese population demographics. Nevertheless, it is challenging to predict at what point North American timber exports may improve, especially because China has supplanted the North American import volume with imports from Russia (its more traditional trading partner) and from other Baltic countries. It is reasonable to predict that China will return to the North American lumber market when prices become more attractive.

Not all is lost in an industry well-known for abrupt changes and literal about-faces. Lumber markets rallied across the continent in mid-May 2015, gaining back a portion of the ground lost earlier in the year. The only certainty in the lumber market is uncertainty itself. Stay tuned.

Ted Tice

Kevin Bergquist, Wells Fargo Agribusiness Consultant, analyzes product processors with special emphasis on the forest products industry.

Kevin joined Wells Fargo in 1995. Prior to Wells Fargo, Kevin worked for 16 years in the forest products industry as an inventory specialist and timberland appraiser. Eight of those years were spent with a prominent Oregon consulting forestry firm, working on projects for large industrial forest products clients.

Kevin graduated from Humboldt State University in Arcata, California in 1979 with a Bachelor of Science degree in Forest Resource Management. Specialized coursework in real estate appraisal was completed with Duke University in 1989. Kevin is a State Certified General Appraiser, licensed by the State of Oregon, with reciprocity granted by several other states, and he has taught numerous courses in timberland appraisal. He is a former member of the Society of American Foresters with the Certified Forester designation.