Lumber production in B.C. held steady in August, but early-year momentum appeared to stall with a modest softening in U.S. housing starts.
Estimated production at provincial sawmills reached a seasonally adjusted 1.05 billion board feet in August, marking a 0.3% gain from July and holding steady relative to levels a year ago. While activity remained above 2012 levels, the recent easing narrowed year-to-date gains to 3% from 3.6% in July.
The slowdown in production is expected to be temporary. U.S. housing starts slowed in the wake of a sharp lift in mortgage rates induced by fears of tapering of the U.S. Federal Reserve’s quantitative easing monetary policy that pushed the 30-year conventional mortgage rate up 100 basis points to 4.5%. But rates have since retreated by 40 basis points on signs the Fed is backing off its tapering bias due to an underperforming economy. That should help housing construction to resume its upward trend as employment and incomes continue to grow. Current consensus forecasts peg U.S. housing starts at 930,000 units this year, up 19%, with a further gain of nearly 25% in 2014.
An extended period of growth in U.S. housing demand, along with Japanese reconstruction efforts and a pivot toward other Asian markets, is forecast to drive positive lumber demand and production. Central 1 Credit Union forecasts annual lumber production to rise about 5% this year and a further 10% in 2014. Persistence of elevated lumber prices will also buoy sector incomes.
But despite the expected upswing, provincial production will remain substantially below mid-2000 highs.
While U.S. housing starts will continue to grow, it will not revisit boom-era activity and a significant proportion of the U.S. market will likely be supplied by domestic producers until housing starts reach a pace of about 1.2 million units.
Meanwhile, supply-side constraints will ensure this will not be a “business as usual” recovery for B.C.’s forestry sector. Output will be strained by impacts of the mountain pine beetle infestation. Companies operating mills in many affected areas continue to face supply constraints that modest demand growth will not fix. Recently announced closures of Canfor’s Quesnel and West Fraser’s Houston mills are a reminder of this challenge.
