Permanent curtailments rise: British Columbia and Pacific Northwest

What a difference a year can make. After seeing lumber prices soar to record highs in 2018 as demand in the first half of the year held solid across all end-use markets and supply was disrupted by severe rail delays from Western Canada, prices have now crashed to cash costs for many producers in British Columbia (BC) and the US Pacific Northwest (PNW). A sluggish housing market paired with an upsurge of capacity growth in the US South has created a significant supply imbalance that has contributed to the sluggish pricing environment we have seen in 2019, and ultimately spurred the string of curtailments realized in the region thus far this year.

Based on our tally, over 2.5 BBF of sawmilling capacity in BC and the PNW is either permanently or indefinitely slated to be removed from the market in 2019. This tally excludes temporary curtailments in 2019, which have also been sizeable; temporary curtailments announced to date will pull an additional 700 MMBF from the market in 2019. The actual figure is almost certainly higher when factoring in unannounced curtailments, which market participants report have been pervasive. This also excludes a strike at a major producer's operations in British Columbia that has been ongoing for several months now, which has also pulled production from the market.

The more prolonged curtailments announced in 2019 have included six permanent closures (depicted in red), two indefinite curtailments (orange) and six mill shift reductions (in yellow), and includes some of North America's largest lumber producers as they grapple with a crunch in sawlogs that will continue to stress these regions longer term.

Curtailments accelerate into the third quarter, with the bulk of the impact in BC

Looking first at the US Pacific Northwest, the string of curtailments here has been notable thus far in 2019. The combination of low lumber prices and already elevated wood costs have contributed to two major sawmill closures and a permanent shift reduction at another facility this year. This removes nearly 500 MMBF of annualized capacity based on our estimates, all of which was effectively realized in the second quarter of 2019. Sawlog availability in the Pacific Northwest has been challenged for many years now as offshore log demand remains robust, logging on federal lands remains restricted and the significant presence of institutional landowners keeping private timber relatively concentrated compared to the US South.

While the PNW capacity base is down 4% year-to-date from the fourth quarter of 2019, the circumstances in British Columbia have been far more challenging in recent months. Our current tally shows nearly 2.0 BBF of capacity will be removed from BC in 2019 alone, which represents a whopping 14% of BC's existing capacity base at the end of 2018. This sharp drop in capacity is the most dramatic the region has experienced over a relatively short period since the Great Recession, when BC sawmilling capacity plummeted by 4 BBF over the span of just over two years.

The capacity losses are concentrated in the BC Interior, which has been plagued by an ongoing beetle infestation that has been a multi-decade affair. Now that the salvable wood remaining from the beetle kill has been mostly processed, the wood basket in the region is starting to tighten, which is reflected in the province's declining annual allowable cut (AAC). Also constraining timber availability has been the back-to-back years of brutal forest fires in 2017 and 2018 in western North America. Harvest and delivery costs for sawtimber continue to rise, and BC producers' ability to pay for marginal wood fiber is hampered by the duties on softwood lumber delivered to the US, which accounts for over 50% of Canadian shipments. These combination of factors paired with slumping lumber prices have ravaged BC sawmills, forcing operators to close capacity to rebalance converting capacity to better align with economically viable timber in the region.

And, of course, the most unfortunate consequence that accompanies the closure of any manufacturing operation is job losses. Based on publicly available information along with several Fastmarkets internal estimates, the sawmill closures in BC and the PNW combined will result in the loss of approximately 1,600 direct jobs. There are also many more jobs tied to these sawmilling operations in supplying industries, along with induced jobs created by spending in the regional economy (e.g., sawmill employees spending money in their local economy). This likely leaves the total impact for BC and PNW anywhere from 4,000-6,000 jobs lost depending the jobs multiplier used, representing a massive impact for these mostly rural communities that are heavily dependent on natural resources and forest products as a source of employment and economic vitality.

Curtailment announcements coincide with record decline in lumber prices

As noted, the wave of curtailments announced in western North America over the last year or so has coincided with an historical rise, and ultimate collapse, in lumber prices. Based on Random Lengths Framing Lumber Composite prices, lumber prices have plummeted from record highs of $567/MBF in June 2018 to well below $350/MBF, shoving cash margins into the red for producers in regions with elevated wood costs as log prices are slow to respond to downstream market conditions.

Lumber prices have languished for most of 2019 as demand has been sluggish due to the rapid increase in interest rates last year and supply constraints for builders trying to build smaller, more affordable homes remain salient (e.g., land, labor, permitting). Meanwhile, total North American lumber production has been buoyed by a surge in capacity entering from the US South, canceling out much of the effect of BC production curtailments and ultimately leaving the market oversupplied.

Several permanent curtailments were announced as early as the fourth quarter of 2018, but the lion's share of permanent cuts have fallen in the second and third quarters of 2019, as producers sensed that the likelihood that demand and prices would rebound was rapidly diminishing. Canadian producers also anticipated the substantial increase in provincial stumpage prices set for July 1 that would put many mills under water, and acted accordingly.

One can hope that the industry is through the worst of its necessary adjustments to cope with the demand/supply imbalances in the BC and PNW wood markets in the coming years. However, with trade tensions simmering and confidence in the current US economic expansion wavering, more curtailments could very well be on the horizon.


Dustin Jalbert, Senior Economist, Lumber, leads the lumber analysis on Fastmarkets RISI's Wood Products team, where he is responsible for the monthly Lumber Commentary and the North American Lumber 5- and 15-Year Forecasts

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