Tariff Tracker: 3 Things to Watch in Lumber

Tariff Tracker:  3 Things to Watch in Lumber

More than halfway into 2018, with a trade war in full swing, it might be difficult to remember now that some of the Trump administration’s tariffs have been in place since last year. 

In November 2017, President Trump levied a 20.83% tariff on Canadian softwood imports – including pine, spruce, and fir.  At the time, the administration justified the decision based on claims made by US lumber producers that asserted that Canadian competitors – supported by the Canadian government – had a leg up on pricing.

Considering the fact that Canada supplies roughly one third of all US demand for lumber, the ramifications of this tariff are not inconsequential.  Here are three things to watch.

1. Lumber Pricing and Profits

Immediately after the tariff took effect, softwood lumber prices jumped and have remained high since then.  In May, the Random Lengths Framing Lumber Composite Price surged to its highest level since its inception in 1995 – a 30% increase over 2017.

According to the National Association of Home Builders, this adds up to an estimated 7% increase in the cost of new home construction in the US. For a single family home, that can translate to up to $9,000 extra (though estimates vary).

However, higher prices can also mean higher profits, particularly for US-based lumber producers like Georgia-Pacific and Weyerhaeuser.  While the former does not report sales data, the latter disclosed its highest ever EBIDTA for wood products in the first quarter of 2018.

2. US Lumber Capacity Expansions

Though the Random Lengths Framing Lumber Composite Price for lumber is at an all-time high, so too is the need for lumber.  According to a May 2018 National Association of Homebuilders/Wells Fargo survey, 31% of single-family homebuilders reported a framing lumber shortage.  This is the highest the shortage percentage has been since the NAHB incorporated the question into its survey in 1994.

This increased demand has given some US lumber suppliers the confidence to invest in expansion, whether it be through building new mills or adding capacity and equipment to existing mills.  However, there are significant roadblocks to these plans, including (but not limited to) finite available land for harvesting, and a time-consuming permit and regulatory approval process. Considering these obstacles, closing the supply gap may be a task that’s easier said than done.

3. Housing Starts

The implementation of the lumber tariffs combined with the inability of US lumber suppliers to meet domestic lumber demand likely means that a heavier cost burden will be passed on to the consumer.  As a result, cautious prospective home buyers will potentially either delay home construction, select a smaller (less expensive) house, or opt to purchase an existing home in lieu of building.  The impacts are already noticeable, as June housing starts hit a nine month low and permits for future construction declined for a third straight month.  If this trend continues, the slow-but-steady recovery of the housing market could be derailed.

Additionally, homeowners looking at high ticket prices may hold off on pursuing lumber-intensive home renovations, which has the potential to negatively impact both contractors and manufacturers of products like flooring, fencing, and cabinets.

To Learn More

Want to find out more about tariffs and the specific global markets they'll impact?  Check out the Freedonia Group's new white paper, featuring insights from industry experts.

About the Author

Alecia Mouhanna is a Corporate Analyst at the Freedonia Group, where she researches and writes about a diverse range of topics, including construction and building materials, chemicals, packaging, and more.