Question

Canadian Wildfires Choke Lumber Supply to U.S. Home Builders

Blazes and trade spat fuel surge in prices

Wildfires in Canada are pushing up the price of lumber, threatening the supply to U.S. home builders. Lumber futures have soared in July as blazes spread across the province of British Columbia, leaving many U.S. wholesalers short-handed. Lumber dealers ran down their inventories this year as a trade spat between the administration of President Donald Trump and Canadian officials sparked wild price swings. Then Canada’s wildfires, a threat every summer, turned out to be the hardest on the lumber industry in more than a decade. Now home builders in the U.S., which gets around a third of its lumber from Canada, fear prices might climb even higher as wholesalers try to restock amid the price surge. British Columbia produces nearly half of all Canadian lumber, according to Statistics Canada. “People need wood now,” said Paul Harder, a timber trader at wholesaler Dakeryn Industries in North Vancouver, which sells to U.S. lumber yards. “Little lumber is being offered out there.” Lumber futures at the Chicago Mercantile Exchange, an indicator of price expectations for the months ahead, rose above $400 per 1,000 board feet in mid-July. That was near a 12-year high reached in April before the Trump administration accused Canada of unfairly subsidizing its forestry industry and started slapping tariffs as high as 30% on some timber imports to the U.S. Canadian officials deny the allegations The tariffs, which are preliminary and could be rolled back this year, add an estimated $1,700 to the price of a typical home, said the National Association of Home Builders. Average new, single family-home prices rose to a record $406,400 in May, according to the Commerce Department. A fifth of U.S. home builders reported a shortage of framing lumber in May, according to a survey by the association and Wells Fargo . Confidence among home builders fell to an eight-month low in July amid concerns over rising lumber costs, the association said last week. “You can’t budget for unforeseen lumber costs,” said Brett Boyce, owner of Split Rock Fine Homes in St. George, Utah, and president of the state’s home builders’ association. He said the cost of lumber for recent jobs has risen about 20%. “It does end up getting passed along to the consumer,” he said. David Goodwin Jr. , a home builder in Memphis, Tenn., has already raised prices about 5% since the lumber tariffs took effect. He said he worries the wildfires could stoke further lumber price increases. A stronger Canadian dollar also has weighed on lumber shipments. The currency has gained nearly 10% against the U.S. dollar since May. Now U.S. home builders say Canada’s raging wildfires are threatening to push prices even higher at the peak of the summer construction season. “A lot of guys had their hands in their pockets waiting for some lower prices in August,” said Brian Leonard, a lumber analyst at the Chicago Board of Trade. “It’s the perfect storm.” Not all are seeing the impact yet. Alan Laing, executive vice president of home building operations for Taylor Morrison Inc., said it is “business as usual” for the Arizona-based home builder, which operates in eight states and had 2016 revenue of $3.6 billion. The prices Taylor Morrison obtains from lumber distributors is a 90-day blended average that doesn’t take into account the recent increase seen on the futures market, he said. “We expect pricing to be flat over the next two to three months,” he said. Additionally, Mr. Laing said he hasn’t heard from suppliers about a potential shortage of lumber, although if wildfires continue, that could lead to an increase in prices of oriented strand board, a type of particle board lumber produced in British Columbia that is used for roof and wall sheeting. Canadian officials said Sunday that some 150 fires were still burning in British Columbia, where about 30,000 people have been evacuated. More than a half-dozen lumber mills, which produce about 14% of the province’s timber and 3% of North American output, according to industry newsletter Random Lengths, have closed. Forest fires haven’t affected prices so dramatically since 2003, said Jon Anderson, the newsletter’s publisher. About 913,000 acres have burned, an area the size of Rhode Island. British Columbia Premier John Horgan on Wednesday extended a state of emergency in the province for an additional two weeks. Meanwhile, U.S. lumber merchants say their stocks are running low. “I wish I had more, but I don’t,” said Stinson Dean, a lumber wholesaler in Kansas City, Mo. “People were gearing up to restock and then the forest fires happen.” Write to Benjamin Parkin at [email protected] and David George-Cosh at [email protected] Appeared in the July 24, 2017, print edition as 'Wildfires Choke Lumber Supply.' SUMMARY: Lumber prices from Canada are being pushed up by a trade dispute with the United States, by wildfires in British Columbia, and by a stronger Canadian dollar. The price increases are creating challenges for U.S. home builders and increasing the costs of new homes in the U.S. The Trump administration has accused Canada of unfairly subsidizing its forestry industry and in April imposed tariffs as high as 30% on some timber imports to the U.S. Any further price increases as a result of the 150 Canadian wildfires that have burned more than 913,000 acres could create unforeseen lumber costs at the peak of the summer construction season. CLASSROOM APPLICATION: This article can be used to highlight the challenges with having a global supply chain and to discuss how tariffs can create difficulties for industries.

QUESTIONS: - 20 pts.

1. Why are prices for Canadian lumber increasing?

2. What are the risks of having a global supply chain that is dependent on one nation for key inputs?

3. How can U.S. construction companies best respond to the increasing prices for Canadian lumber?

4. What are the advantages and disadvantages to the United States of imposing tariffs on imports of Canadian lumber?

Answer 1

1. Prices for Canadian lumber is increasing due to shortage in supply( as a result of wildfires in Canada), high tariff imposed by U.S administration and the appreciation of Canadian dollar with respect to U.S dollar.

2. When there is a global supply chain that is dependent on one nation for key inputs, it can result in supply disruption and increased prices of the inputs and there by increasing the price of the final product. Trade disputes with nation providing inputs can lead to shortage in supply and there by leads to increase in prices.

3. U.S construction companies will most likely pass the increasing price of Canadian lumber to the consumers. But higher prices can reduce the demand. The companies can look for substitute for lumber and use such substitute for construction and there by reducing the dependence on foreign nations for key inputs.

4. With the imposition of tariffs on imports of Canadian lumber, the price of Canadian lumber will increase. This has both advantage and disadvantage. On one hand it will reduce the demand for Canadian lumber and there by reducing the import of Canadian lumber to U.S. It can improve the Balance of Trade position of U.S in relation to Canada.

But on the other hand , increase in the price of Canadian lumber can severely affect the construction industry in the U.S. They have to pay more and it will be passed down to the end consumers and there by raising the price of houses in U.S. There are also chances of Canada retaliating with tariffs on U.S imports and there by affecting the Balance of Payment position.