Lumber industry braces for rising prices, potential super cycle

Jaz King, an employee of Pine Ridge Construction Co. Inc., Wild Rose, trims a wooden stud Jan. 15 before securing a top plate at the site of the Mammoth Springs apartment development in Sussex. The national lumber industry is bracing for the possibility that material prices will increase as supply fails to meet demand. (Staff photos by Kevin Harnack)

There are two words the lumber industry dreads, a phrase that signifies a market trend in which prices run amok in a futile attempt to let supply catch up with demand.

It is a super cycle. And, though there is no consensus on the seriousness of the threat, some of the people who analyze and forecast lumber prices say the cycle soon will return for the first time since the early 1990s.

A super cycle starts when demand increases too fast for suppliers to adapt, said Sean Shields, legislative and regulatory affairs manager for the Madison-based Structural Building Components Association. During normal market fluctuations, he said, increasing prices makes it cost-effective to harvest timber that normally would be too expensive. That lets suppliers ramp up production.

“Somewhere in there, typically, price will go back down,” Shields said.

But during a super cycle, he said, various factors make it difficult to increase supply, and prices keep going up while demand goes unmet.

This time, Shields said, the industry can blame the super cycle threat on a beetle, the Chinese market and lumber production in Canada.

Seeds of a super cycle

The mountain pine beetle, Shields said, is plaguing forests in the northwestern United States and western Canada, killing off swaths of high-end timber.

Since 1999, the beetles have swept through British Columbia, according to government ministry Natural Resources Canada, and will kill about 58 percent of the province’s pine trees by 2017. The beetle kills trees by burrowing between bark and interior wood, which then takes on a blue tint.

“It’s not a very pretty-looking wood,” Shields said.

But contractors in China were not picky. They used the blue-tinted wood to make frames for concrete construction.

So Canadian lumber companies saw a way to combat the beetles and make money, said Paul Newman, executive director, market access and trade, for the Vancouver-based Council of Forest Industries. Those companies aggressively harvested the infested timber and sold it to China.

Now, however, the lumber preferences in China are changing. Newman, who is skeptical that a super cycle is looming, said Chinese builders are shifting toward buying No. 2-grade lumber, which would otherwise be bought by U.S. customers, and that change will influence prices in the United States.

Wisconsin contractors already are experiencing the effects. Lance LeMaster, buyer at Milwaukee-based Timber Creek Resource LLC, said he has noticed mills he frequently buys from in western Canada are favoring Chinese orders, which can be in the millions of dollars, and not sending wood to the United States.

“Sometimes,” he said, “you just can’t compete.”

Dan Soltis, an employee of Pine Ridge Construction Co. Inc., Wild Rose, secures a post base for a deck Jan. 15 at the Mammoth Springs apartment development in Sussex.

The supply and price problems get worse when factoring in Canada’s restriction on timber harvests, said Russell Taylor, president of Vancouver-based International Wood Markets Group. Canadian provinces set caps on the number of trees that can be harvested to protect the long-term sustainability of the lumber supply.

And, Newman added, he expects a reduction in the harvest caps for the provinces of British Columbia, Quebec and Ontario.

All of those factors, Taylor said, mean the United States, which once bought one-third of all of its lumber from Canada, might soon get only one-fifth of its supply from the country. And if a super cycle hits, he said, softwood lumber prices could rise as much as 25 percent higher than ever before.

“The speed of the housing market,” Taylor said, “will tell you how high prices are going to go.”

Super cycle skepticism

The only way out of a super cycle, Shields said, is for suppliers to find an untapped source, such as timber on privately owned land, or for demand to drop.

But, according to the National Association of Home Builders, demand will not decrease soon. According to the association, single-family home starts in 2013 increased about 15 percent year-over-year.

If the industry keeps that pace in 2014, Taylor said, lumber prices should not fluctuate too much. But if the NAHB’s projection is true that housing starts in 2014 will increase 32 percent year-over-year, Taylor said prices will skyrocket.

That is not a sustainable pace, said Matt Layman, publisher of Layman’s Lumber Guide, and that means the threat of a super cycle is hollow.

“There’s no basis,” he said, “for there to be a shortage of anything.”

Lance LeMaster, of Timber Creek Resource LLC, stands near 4-by-6-inch, rough-cut lumber Jan. 17 at the firm’s Milwaukee shop.

Layman forecasts when lumber costs will rise or fall but not what the prices will be. Unless builders get back to the roughly 2 million starts they were at before the recession, he said, there is no cause for concern.

And the insistence that there is cause for concern despite the lack of hard evidence can get tiresome, Newman said.

“To be frank,” he said, “it hasn’t come to pass.”

Newman did not dispute that prices will increase and that some builders will struggle to find lumber. But international suppliers, he said, will fill the gaps.

“Wood will come from surprising places,” Newman said, “and in large volumes.”

European producers, for example, are showing up in China, he said. Scandinavian mills are not producing as much as they can, he said, and could ramp up to help meet American demand.

Taylor said Europe used to supply about 5 percent of the softwood lumber used by U.S. homebuilders. When the recession hit, he said, that dropped to almost nothing.

But prices would have to rise beyond where they are now and stay there, Taylor said, for European manufacturers to make money in the United States. And even if those suppliers returned, he said, their contribution to the market would not be enough to satisfy demand.

The average price in 2013 for 1,000 board feet of spruce, pine or fir was $370, Taylor said, and the price would have to be at least $400 to lure back European sawmills.

The average annual price for framing lumber has not neared that level since 2004 and 2005, according to Random Lengths Publications Inc.

Bracing for the cycle

The last time U.S. homebuilders experienced a super cycle, Taylor said, was when the U.S. government halted logging in the forests of the Pacific Northwest to protect spotted owl habitats. It took three years to adapt to the supply shortage.

That cycle, Taylor said, was not as severe as what is coming.

And some of the effects already are measurable. In 2013, framing and truss lumber accounted for 17 percent of a home’s construction cost, according to the NAHB, compared to 13.5 percent in 2011.

“There’s a lot of concern that the cost of lumber, then, is going to go up significantly,” Shields said, “and we’re starting to see that.”

According to Random Lengths, the average monthly price for 1,000 board feet of framing lumber in 2013 fluctuated between $437 in April and $329 in June. The April average was the highest since August 2004.

“There’s this confluence of a lot of different, separate events,” Shields said, “that are going to extremely curtail supply.”

LeMaster said he expects average prices for 1,000 board feet to hover around $400 for at least the next two quarters. He said he believes the warnings about a super cycle.

Jason Blenker, president of Amherst-based Blenker Building Systems Inc. and an SBCA member, said he expects prices to rise by as much as 20 percent during the next three months.

“There’s really not a lot you can do,” he said.

Average lumber costs for a single-family home using Blenker Building’s structural components are $25,000, he said, so a 20 percent increase means customers could pay a lot more.

But higher prices, Shields said, could help some of his members. When lumber is expensive, components are more attractive because they require less lumber than stick-built homes.

Manufacturers that have the money to withstand volatile prices could do well in the coming years, Shields said. Others, he said, will be driven out of business.

But for now, he said, all anyone can do is wait to see how bad it gets.

“They just know it’s going to go up,” Shields said, “and go up quickly.”