Why Lumber Costs Continue to Rise and What to Do

Lumber costs rose sharply again at the end of last week, leaving component manufacturers wondering how to react. The following article provides some insight into the causes behind the sudden spike in cost, what may happen in the near future, and what CMs should consider going forward.

The first observation is that since the last SLA expired, free lumber trade between the U.S. and Canada has resulted in a stable lumber market. The cost of lumber rose naturally and systematically as supply and demand conditions dictated, and as such both producers and consumers of lumber were able to reasonably adjust to cost fluctuations.

Unfortunately, current U.S. trade policy is not good for component manufacturers and all lumber consumers. The policy allows, even incentivizes, U.S. producers to seek countervailing and anti-dumping duties (CVD and AD).  In the case of softwood lumber, the U.S. Coalition for Fair Lumber Imports (CFLI) has repeatedly taken this course of action every time a softwood lumber trade agreement (SLA) has expired.  For more information on who makes up the CFLI and the trade actions they are after, read our recent article: Lumber History Repeats Itself, and It's Gotten Ugly.

The second observation is that there is very little information currently available on what will happen in the near term with regard to protectionist trade action.  One diplomat from British Columbia recently indicated they believe there is still a ‘window of opportunity’ for both sides to reach an SLA before the end of the year. However, the Trump Administration has not yet gotten approval for the individuals who will be empowered at the US Trade Representative’s Office to make decisions at the negotiating table.

The same can be said about the Department of Commerce (DOC), so there is considerable speculation on both what level the protectionist trade action will be (i.e. the CVD and AD), and whether those duties will be applied retroactively from the time they are announced backward up to 90 days.

The third observation is that the current date when there will be more information is April 24.  This is the deadline for the DOC to publish its determination on whether the lumber producer members of the CFLI are indeed harmed by imports of Canadian lumber.  Again, based on the CFLI member’s political connections, and the allowances of U.S. trade law, it is currently expected the DOC will find the CVD and AD will be around 30% (it’s important to emphasize this is nothing more than an educated guess). After the paperwork is filed (which can take a few days), those duties will be paid by Canadian lumber mills on all shipments of lumber going across the border into the U.S.

Looking at the lumber cost increases over the past two months, it appears likely lumber producers on both sides of the border are hedging their bets based on the lack of concrete information, and that is what spurred the initial jump in lumber costs in February.  As background, on January 20th, 2017, the 2x4 Western SPF cost was $306. Over the next four weeks it went up to $389 (up approximately 27%), and then rolled back to the $350-360 range (about 16% over the January 20th cost). At the end of last week the cost went back up to $392 (back up to the 27% over the January 20th cost).

The run at the end of last week was not anticipated as most of the lumber mills had indicated to the market they were waiting for the April 24 deadline to take a reactive approach.  However, as Random Lengths points out, one mill decided to be proactive and raise the end user’s lumber costs and the market reacted. Through the ensuing activity, the new cost of $414 was found to be at a level the market supported. While there are costs that are roughly $100 per thousand higher than the $350-$360 costs, the $400 per thousand appears to be a cost the mills will attempt to sustain in the near future (a level in line with the anticipated 30% CVD and AD). In other words, the lumber market is doing its best to cost in a 30% penalty today for shipments to be delivered after May 1.

The final observation is that there is uncertainty about what the near future will bring with regard to lumber costs.  First, there is the chance the April 24 date will be moved.  The U.S. can decide this is a “complicated” trade case and postpone the determination date.  Second, it is unclear whether the CVD and AD will indeed be imposed retroactively from when the determination is announced. Third, while it is assumed the CVD and AD will be around 30%, no one is sure how the market will react if that percentage is significantly higher or lower.

The bottom line is the root of this uncertainty is caused by the actions of the CFLI in pursuing trade action when the lumber market was clearly functioning well on its own. It’s important for component manufacturers to resist buying into the emotion this uncertainty causes; embrace the fact a 30-40% lumber cost increase is being aggressively pursued; and, begin to consider how to pass these higher lumber costs on to current customers. Please keep the above observations in mind as lumber markets move up and down over the next few weeks, as it is assured they will until this there is greater clarity on trade remedies.