print-icon

Lumber Industry Has No Interest In New Mills As They Reap Rewards Of Record Prices 

Tyler Durden's Photo
by Tyler Durden
Monday, May 17, 2021 - 07:50 PM

The problem with the North American lumber industry is that supply is controlled by just a few firms that can easily manipulate prices. For instance, WSJ reports lumber mills are in no rush to bring on additional capacity as they reap the rewards of consumers paying four times the average price. 

North America's sawmills, such as Weyerhaeuser Co., West Fraser Timber Co., Canfor Corporation, Interfor Corporation, and PotlatchDeltic, are in no hurry to boost new capacity as they rake in the cash as lumber prices soar. Consumers have been on the opposite side of the stick, and soaring lumber prices added nearly $36k to the cost of building a new home in less than one year. 

Lumber executives told WSJ they "aren't racing out to build new mills" as they are contempt with elevated prices boosting their quarterly net incomes. Usually, when commodity prices soar, new supplies flood the market, but that doesn't seem to be the case here. 

By now, readers know soaring lumber prices have been due to a combination of factors, including record-low mortgage rates sparking a housing frenzy, home renovations, and, of course, sawmills reduced capacity at the beginning of the pandemic anticipating lower demand. 

Executives at Weyerhaeuser Co. and West Fraser Timber Co. said they would increase budgets to boost efficiency and output at their existing mills in the South, where a glut of cheap timber resides. Some executives don't mind accumulating a surplus amount of cash as the times are good but aren't using the money to construct new mills. 

"We are going to be ultra-cautious on what we do in those regards," Canfor Corp. Chief Executive Don Kayne told investors last month when he announced record quarterly profits.

"We don't mind at all having a little extra cash around for sure, considering what this industry goes through."

Chad Hesters, who advises lumber executives and investors as managing partner in the Houston office of consulting firm Korn Ferry, told his clients not to build any mills during this cycle because "they are too late." He said that by the time a new mill comes online, the industry's cyclical nature could quickly turn, and new investments shift into "a good way to lose money." 

So in the meantime, the North American lumber industry has no incentive to bring on additional capacity as they remain cautious and enjoy the fact their quarterly net income is some of the highest in years - all at the expense of the consumer. 

Source: WSJ

Why would lumber companies ruin the profit-making party with added supply? 

What's concerning is that lawmakers on Capitol Hill are more concerned about GameStop retail daytraders in their parents' basements than consumers paying four times the amount for lumber than a year ago. 

Will there be an inquiry when this bubble bursts too?

A Lumbear market.

0