By Mark R. Smith, Contributing Writer
Among the curious aspects of the COVID-19 pandemic is that it could have unexpected effects on given markets, with some predicted lows, yet unexpected highs.
For example, consider the forestry and lumber market. When the shutdown started, millions of people were suddenly forced to telecommute, in addition to having their social lives thrown into a state of limbo. So when an active person is suddenly home much more than usual but without as much to do, what’s a wise way to spend one’s time?
Getting busy with those home projects that they’d been putting off, that’s what.
That meant a few trips to The Home Depot, Lowe’s, Ace Hardware, etc., to buy supplies and lumber. But that also meant finding out that lots of people had the same idea and one 2” x 4” cost about five times the pre-pandemic price. And that there isn’t much lumber left to buy. That’s partially because of mill mergers before the shutdown, which are part of the reason for the dearth in supply.
So, the ripple effect was in action. And the shifts in the market, as the world works out of the pandemic, continue.
Varying Factors
Given the run on lumber that began in spring 2020, it’s obvious that a great number of people heeded the various government dictums to stay home. “A key moment we saw early in the shutdown,” said Taylor Gravois, principal with CSRS Inc., a site selection and consulting firm headquartered in Baton Rouge, Louisiana, “was the adjusting of low interest rates, which were another factor in the home renovation market.”
Not surprisingly, Gravois and his wife were among the legions who suddenly became handy. “We ended up remodeling most of our home last year,” he said, “but that trend also shined the spotlight on the lack of capacity in the sawmill sector. It was interesting that you didn’t see the stumpage prices rise (the selling price a forest owner gets for selling raw timber). It remained relatively flat.”
To Gravois, the trend pointed to a new reason for a familiar tale. “That’s where the industry fell apart in the 2008 recession,” he said. “Building a new sawmill is very expensive – the cost can reach $200 million plus – and the demand to build one depends on the number of board feet absorbed annually into the market.”
“Also, if you look at annual new home starts, the overall industry is at historic lows,” he said. “That market never really recovered after the last recession. Then the low-interest rates and pandemic sparked an increase in the home renovation market, diverting money to renovations when most people weren’t spending money on vacations and travel.”
The other aspect to consider is annualized new home starts “by various decades to compare to the low housing starts since World War II. Now we have to look at new home starts for the 25 to 35 year-old market,” said Gravois. “Those millennials are buying now and will be the biggest buying group for the next 5-10 years. I think that issue is affecting some markets that lack home inventory.”
He also commented on the demand from the print media sector, “which does not look good” but also packaging and shipping material, which looks very good.
“It’s been called the ‘Amazon Effect’ due to the increased online shopping demand during the pandemic. Most people were forced to buy things online during the lockdown, but we’ll see if boomers and GenXers maintain that behavior,” said Gravois. “Millennials grew up buying online, but overall, there could be a shift. People are creatures of habit by our very nature and some relish shopping outings.”
High Costs
While the sawmill issue is part of the industry’s quagmire at the moment, obtaining raw materials is not. Steigerwaldt Land Services, of Tomahawk, Wisc., supervises wood harvesting and management, and Chairman Edward Steigerwaldt doesn’t think COVID-19 hurt the industry “as far as producing wood goes.”
“Some [species] naturally reproduce, such as Aspen and to lesser degree maple, spruce and balsam,” said Steigerwaldt. “But pine is usually planted by laborers from Mexico. I’m not saying other companies didn’t have problems, but we didn’t and I don’t know of many that did. We were concerned about labor, but it came though.”
One issue that affected production in the Midwest was that a Wisconsin Rapids, Wisc., paper mill, Verso, closed down. “That meant we had product that we could not sell and it’s still sitting. We used to sell the leftover pulpwood material to paper companies, but that demand steeply lessened. But we can sell it when the market improves, hopefully by the end of the summer.”
As Gravois mentioned, paper mills have been under much stress and many of them are very old, “sometimes 80 years or more,” said Steigerwaldt. “The machines are pretty basic and the millwrights keep them going due to the cost of the replacing machines.”
The paper mills that are in operation are generally very busy, Steigerwaldt said, but those that have shuttered generally dealt with fine writing paper or other products that “are less in demand. However, those that focus on cardboard and boxes are all doing well because the demand that has been heightened of the shipping industry.”
Prices Down
Warren Peters, president with Peters Forest Resources, also of Baton Rouge, echoed many of the above observations.
“During the shutdown, trucks were constantly in and out of The Home Depot,” etc., said Peters, “and at the same time, you had large home building companies, like D.R. Horton and others, getting orders, so they had to buy whatever they could get when [homeowners] were buying out big box stores.
“The mills could not keep up with the demand, especially after the consolation that started about 20 years ago, but kicked in 15 years ago,” he said. “We saw consolidation of the big companies – such as Georgia Pacific, Weyerhaeuser, Canfor and Interfor, which bought a number of mills in the Southeastern U.S. – and lost smaller ones that could not compete due to owning old equipment and having no capital to invest. Then there were the family concerns, which tend to run out of steam after two or three generations.”
However, today the market is opening up. “It’s getting easier to acquire materials as we work beyond the pandemic, as lumber futures started to catch up by mid-spring,” said Peters. “The evidence is that wholesale lumber prices have fallen, which points to an increasing amount of product on the market.”
As for the housing market, “It looks like housing starts have leveled off in the U.S.,” he said. “If interest rates creep up, that will cool demand. There are still plenty of people refinancing their homes, as well as building new homes.”
New Sawmills
On the timber side, “You would think the run up in lumber prices would have been similar for timber prices, but not so,” said Peters. “We’re still growing more volume then we can cut. Trees take 20-30 years to mature, but can be cut and processed as early as 20. But there’s no need to do that today.”
Large concerns and holding companies own and manage millions and millions of acres of timber land. Then are also many private land owners who own a similar amount of land and sell to a mill.
“Lumber prices will level off and may rise again, but probably won’t come back to June 2020’s record wholesale prices of $1,670 for one thousand board feet,” Peters said. “We’ve have already come down to $1,300 as of late spring. However, a year ago, it was $356.”
Given that wide variance, he still sees the lumber industry as being “solid as we move forward. The industry has made fantastic profits during the last year because of the split between raw materials and finished product, and we will continue to reap the rewards of the busy market,” he said. “On the flip side, the land owners have not benefitted from this run up and it will take time to cut through the excess inventory.
“We’re still growing more than we’re cutting and remember,” he said, “that’s after the mills had down time due to the virus, right when the lumber prices shot up.”
Today, Peters noted, two new sawmills were announced in December 2020 in Mississippi by Idaho Forest Products and Biewer Lumber and another from Canfor in Louisiana this past June in the past two months. “The industry sees opportunity,” he said, “and is expanding.”
Tariff Times
John Gifford III is president of Forecon, which operates in West Virginia, Pennsylvania and New York. The company consults in a wider space concerning hardwood species like black cherry, hard and soft maple, white ash, and red and white oak.
Concerning the state of the market, Gifford said before COVID-19, Forecon was dealing with “the China tariff issue. Hardwood exports from the U.S. to China slowed the market for the prior 18 months; then just as Trump administration signed the agreement to certain conditions that allowed more exports, prices improved.”
But then the virus hit. “Then trade associations pushed our three state governments to basically approve of our industry as an essential business. That allowed us to resume operations,” he said. “So we worked remotely via homes and even vehicles, and we were able to accommodate logistical changes.”
Still, early in the “COVID-19 funk, sawmills still weren’t considered essential businesses. When they finally reopened by June, production was slower,” Gifford said. “Even our mom and pop clients were cautious because they waited for the market to return.”
But then demand returned, partially because homebound workers were busy with the aforementioned remodeling and upgrading, but also because they were buying more furniture not only for their homes, but their home offices. “But our product is more of a finishing product and housing starts were skyrocketing due to pent-up demand and low interest rates,” he said, “and as the pandemic declined in their minds, the market shot up.”
Evolving Prices
As of today, the pricing for softwood lumber is expected to continue to decline, in some cases fairly sharply. But that should help continue the trend of rising housing starts as we move forward,” Gifford said.
“As for our hardwood, since last March we’ve seen an incredible pent-up demand. As people got pandemic checks, the world moved forward,” he said. “In the past when we saw a pickup, it might be for a specific species, but now we’re seeing it for about every hardwood species we can sell.”
In some cases, the uptick has been “quite significant, like hard maple. For example, since the first of March, we have seen prices for that species rise about 60 percent go,” said Gifford, though it was slowing down slightly [at press time] because the sawmills are getting too much supply.
Still, after the trauma of the past year, the forecast by Gifford and others tends to one of optimism. “This business is always cyclical,” he said, “but all we’re predicting a great year.”
Bio: Odenton, Maryland-based Mark R. Smith joined Expansion Solutions after having written about site selection among the vast number of topics he has covered in the business universe. That part of his career began in 1993 when he joined The Daily Record, a Baltimore business and legal publication, where he delved into the worlds of economic development and commercial real estate, among numerous other industries; in 2003, he was named editor-in-chief of The Business Monthly, another Maryland publication that covers the scene in the Baltimore-Washington Corridor counties.
Concurrently, he’s written at length about the film and video industry for a variety of publications, and about his other loves, including music, sports and leisure.
