The lumber industry has been caught off guard by Canadians’ financial resilience during COVID-19, resulting in shortages that are derailing home improvement plans.
According to data from Statistics Canada, 5.5 million Canadian workers have been affected by shutdowns, either through a drop in employment or COVID-19 related absences. The unemployment rate has gone from 5.6 per cent before the pandemic to 12.3 per cent.
Despite the devastation to the job market, spending on home repairs and renovations fell only 5 per cent in May, compared to January.
“The lumber industry was not expecting this as can be seen by their production. U.S. lumber production was up an average 6 per cent year-over-year per month [from January to March] but dropped 7 per cent year-over-year in April and Canadian production was down 8 per cent year-over-year in the first three months of 2020 but plunged 34 per cent in April.” Paul Jannke, a principal of Forest Economic Advisors (FEA), told Yahoo Finance Canada.
“These production numbers indicate that the industry was very pessimistic about the prospects for lumber demand with the economy shutting down to prevent the spread of COVID-19.”
As a result, people like Brampton, Ontario’s Isaiah Khan have to do a lot more legwork to get their hands on lumber for projects.
Khan was supposed to be in Mexico for a family vacation, but the pandemic put the brakes on those plans. He decided to use the time to redo his backyard, which included his deck.
But when he called around to see which retailers had the wood he needed, it was sold out. He checked Home Depot’s app, which told him it was available at a location in nearby Bolton, Ontario.
“Turned out that there was nothing there and I tracked down a Home Depot location in Hamilton. So I told them I was coming from about an hour and a half away from Bolton and they did me a favour and put some aside for me,” Khan told Yahoo Finance Canada.
“But we're talking about driving all the way, an hour and a half out to Hamilton just to get lumber that is in short supply everywhere.”
Khan says the Hamilton location suggested he might want to stock up on pressure treated wood, which is popular for outdoor work, because a supplier was shutting down for the summer. He was told that could mean it will be out of stock and Khan could always return what he doesn’t use.
Home Depot didn’t respond to questions from Yahoo Finance Canada about supply shortages. Khan also checked Lowe’s, which told Yahoo Finance Canada “for competitive reasons, as a policy we don’t discuss sales regarding specific product categories.”
Unprecedented mill closures
Paul Jannke says lumber demand is seasonal. It falls in the fourth quarter and first quarter as the building season slows down. So demand is naturally higher quarter-over-quarter, but slower on a year-over-year basis.
“So while demand was up, it was not up as much as one would “typically” expect given past seasonal patterns,” said Jannke.
“So, the bigger driver in the shortages of lumber were production curtailments in response to expectations of sharply weaker demand. When the sharply weaker demand didn’t materialize, shortages ensued.”
Jannke says FEA has tracked 176 announced mill closures in March and April, which he says is unprecedented.
“There were 101 curtailment announcements in all of 2019. And 2019 was a weak year for lumber consumption.”
Prices going through the roof
The shortages have led to price increases for the raw material too. SPF lumber is a combination of Canadian spruces, pines, and firs from different parts of the country. SYP stands for southern yellow pine and grows in the southern United States.
“Random Lengths reported that W. SPF benchmark prices increased by a record 14.1 percent or $70 W/W to $568/mfbm ($36 higher than midweek),” said Hamir Patel, director of paper & forest products, in a research note. “In the South, SYP 2x4 prices rose 1.2 per cent or $6 W/W to $516/mfbm, while the SYP Composite rose 3.5 per cent or $19 to $567/mfbm.”
“Over the past 15 weeks, SPF prices have risen 101% while the SYP 2x4 benchmark is up 63%.”
If the situation persists, elevated prices could pave the way for retailers to pass on the additional cost to consumers in the coming months. But Joel Neuheimer, VP responsible for trade, at Forest Products Association of Canada (FPAC) says the situation is temporary but will take some time to resolve itself.
“Production will catch up with increased demand, but it will take a number of weeks as the shortage has been mainly due to curtailments and production coming offline in Canada earlier this year due to COVID uncertainty and challenging markets,” Neuheimer told Yahoo Finance Canada.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.