British Columbia is on fire

July 5, 2021

By: The Working Forest Staff

FORTUNE.COM — Residents of Lytton, B.C. were evacuated just before a wildfire swept in, claiming two lives and destroying more than 90% of the town. The BC Wildfire Service warns the situation could soon get worse: In total, more than 100 wildfires have sprouted up in Western Canada following a record-setting heatwave during which temperatures exceeded 120 degrees in some areas.

These fires—and the threat of a bad wildfire season in British Columbia—already has some in the lumber industry nervous. Why? British Columbia isn’t just a major lumbar producer, it’s the North American mecca. Among the six largest North American lumber producers, three are located in British Columbia: West Fraser Timber (No. 1), Canfor (No. 2), and Interfor (No. 6). Over 90% of British Columbia’s forestry output is exported, with the U.S. receiving over half of it.

Canadian softwood lumber—not the plentiful Southern Yellow Pine that dots the U.S. South—is the clear favorite among U.S. homebuilders. Even before the pandemic, softwood production in Western Canada was limited by a combination of past fires, beetle infestations, and the slow growth rate of spruce trees. As a result, lumber producers are struggling to meet the enormous demand from a boom in housing and DIY projects set off by the pandemic—and that has helped to create a huge increase in the price of lumber that only recently eased.

If British Columbia’s fires slow Canadian softwood production by even a little, it could have major implications. After all, the North American lumber shortage continues, to a point. While the price of lumber is down 51% from its May 28 peak, it’s still up over 115% from pre-pandemic levels, according to trade publication Fastmarkets Random Lengths. Demand still outmatches supply, creating a risk that disruptions like wildfires in the West or hurricanes in the Gulf could impact prices.

British Columbia forests aren’t the only place at risk. Temperatures in parts of Oregon and Washington—which are major players in the forestry industry—also set records this week and are experiencing their own fires. Through the past six months, wildfires have already burned 1,480,800 U.S. acres this year. That’s up 1% from the same period in 2020, and up 29% from the same period in 2019. However, the 2021 burn rate through six months is lower than it was during the first half of 2017 and 2018, which were historically bad years.

“As forest fires develop across our country and Canada, we will be undersupply constraints that are of no fault of the market,” says Chip Setzer, director of trading and growth for Mickey Group, a commodity trading platform. If this fire season is anything like past years, Setzer says, lumber prices could easily swing up 10% to 20% from their current levels. That’s still nowhere close to the May peak price, but it would mean another price shock for homebuilders and DIYers.

While lumber futures climbed modestly on Thursday and Friday, the wildfires have yet to create a major disruption in the lumber market. This week the “cash” market price fell another $160 to $770 per thousand board feet, according to Fastmarkets Random Lengths. That’s down from its all-time high of $1,515 in late May, and nearly double the composite’s pre-pandemic price, which typically fluctuated from $350 to $500.

“The fires could impact production, but thus far it doesn’t seem to be a huge factor,” Dustin Jalbert, a senior economist at Fastmarkets RISI, where he covers the lumber market, told Fortune. Undisturbed by natural disasters, he says, prices are likely to fall further over the next few weeks as recent “inventory buildup” at sawmills begins to flow down the supply chain.

As Fortune has previously reported, this historic lumber shortage was spurred by a perfect storm during the pandemic. When COVID-19 broke out in spring 2020, sawmills cut production and unloaded inventory in fears of a looming housing crash. The crash didn’t happen—instead, opposite occurred. Americans rushed to Home Depot and Lowe’s to buy up materials for do-it-yourself projects, while low recession-induced interest rates helped spur a housing boom. It was exacerbated by a large number of millennials starting to hit their peak homebuying years, helping to dry up housing inventory and sending buyers in search of new construction.

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