According to the Random Lengths Framing Lumber Composite Index, the price of softwood lumber in the United States has soared by nearly 60% in 2020. The price of softwood lumber in the United States is expected to rise by another 4% in 2021. From a regional perspective, the increase in SPF prices in the western region will exceed that in other regions.
U.S. softwood lumber consumption demand will remain strong in the next two years, but the capacity growth of North American lumber mills is still limited. This is because of the shortage of raw material supply after the outbreak of mountain beetle in BC, Canada, and the decline in production capacity in 2020 In response to COVID-19, U.S. material mills cut investment expenditures for new capacity expansion;
US dealer inventories at historically low position, there will be no major improvement in 2021;
By 2022, as the increase in new capacity of lumber mills in the southern United States begins to keep up with the growth of consumer demand, softwood lumber prices will fall.
End consumer market
Residential construction is the largest consumer market for softwood lumber in the United States, accounting for 70-75% of total consumption. The two main consumption components of residential construction are expenditures on new housing construction and housing renovation. New housing construction is expected to remain strong in 2021-22.
There are many reasons, including historically low interest rates, moderate income growth (especially for potential home buyers), and very favorable population distribution, rigid demand restrained by the low construction start rate in the United States in the past decade, low inventory of houses for sale, etc. In addition, residential renovation spending will also maintain a strong momentum. The average age of existing homes in the United States is 42 years and the average area is 1,700 square feet, while the average area of newly built homes is close to 2,500 square feet. Those old housing stocks have great potential for consumption demand for housing renovation or increasing housing area.
Softwood lumber supply
North American softwood lumber production will hardly meet demand in 2021. The production capacity is restricted because of the limited supply of raw materials in Canada’s British Columbia and the west coast of the United States, and the lack of a surplus market in eastern Canada. In addition, the reduction in investment expenditures for lumber mills in 2020 has delayed capacity expansion, which has further exacerbated the shortage of sawn timber supply. With the recovery of investment spending on new production capacity at lumber mills in 2021, sawn timber output in the southern United States will increase significantly in 2022. Some of the new capacity will be put into operation in 2021, but it is still not enough to meet the growing demand. Until 2022, there will be enough new production capacity to meet the growth of consumer demand.
When the COVID-19 outbreak occurred in 2020, dealers expected that consumer demand would become weak, thereby reducing inventory, but consumption actually increased substantially. But when dealers increased purchases from sawmills, they found that the sawmills also reduced production in response to COVID-19. In the past 20 years, dealer inventories have basically changed from a low of 1.12 months to a high of 2.57 months, but the current dealer inventory is only 0.63 months-at a historical low. Dealer inventories are expected to remain at a low level in 2021 and will not return to a more normal level until 2022.
Softwood lumber prices
U.S. softwood lumber prices reached their highest level in decades in 2020, and much relief is not expected in 2021. Since the housing industry is regarded as an important industry, consumer demand has risen sharply during the COVID-19 outbreak. At present, dealer inventory is still at a historical low point, consumer demand continues to rise, and production capacity growth is slow. Softwood lumber prices will continue to rise in 2021. At the same time, lumber prices will remain high in 2022, but will be lower than the level of 2021-21. As the sales price of softwood lumber in 2020-21 is much higher than the production cost, the investment expenditure of lumber mills for new production capacity will resume in 2021, which will also promote the output of lumber mills to keep up with demand in 2022. Therefore, lumber prices are expected to fall back to more normal profit levels.