Extraordinary Times for Lumber and Building Products

By Steve Borritt
Published December 2, 2021 | 2 min read

Growth, Innovation and Sustainability

When the world shut down in March 2020 and the economy along with it, the North American forest products industry braced itself for a repeat of the Great Recession and U.S. housing market collapse. Unexpectedly, a convergence of favourable factors propelled it in the opposite direction instead.

Money normally spent on travel and entertainment accumulated in bank accounts and demand for lumber and building products soared as housebound homeowners redirected their spending towards renovations and new home builds spiked. The result? Lumber and building materials prices soared to staggering levels in late 2020 and early 2021 as demand far outpaced tight supply, placing companies - many of which had been grappling with forest fires and sawmill closures due to beetle infestations - in the best financial health they have experienced in decades.

And while the pandemic-driven elevated prices have now subsided, it is expected that average price levels will move higher over the next few years as U.S. housing starts strengthen, new sources of demand for wood products become more commonplace, and supply shocks that impacted the industry for the last decade, continue to persist.

The robust health of the lumber industry is accelerating dynamic changes. With strong balance sheets and a growing awareness of the industry’s environmental, social and governance (ESG) role, companies large and small are looking to invest in growth and innovation.


Growth and Expansion

M&A activity in the sector has been robust during the first 18 months of the pandemic, with both private and publicly traded companies buying up assets as they become available. And there are still plenty of domestic opportunities for players of all sizes. For smaller, family-owned sawmill businesses, there is perhaps no better time to sell.

The pace and size of M&A activity was driven by a number of factors including production capacity growth and geographic diversification.  The largest deal of the year was the C$4.6 billion acquisition of the world’s largest oriented strandboard (“OSB”) producer, Norbord, by the world’s largest lumber producer, West Fraser. Eight months after the Norbord deal closed, West Fraser announced two other purchases to expand its footprint in the United States. Similarly, Interfor continued its growth this year, having acquired five US-based sawmills in the first six months and then recently announced the acquisition of Eacom Timber; these transactions have increased Interfor’s production capacity by over 60 percent in 12 months.

Aside from growing through acquisitions, numerous industry players are utilizing their pristine balance sheets to undertake new greenfield plant expansions; seven new turn-key sawmills are on the order books from both publicly traded and private companies. Engineering firms such as BID Group and USNR are set to deliver these completed, state-of-the-art sawmills to their new owners over the next two to three years.


A Future Rooted in Sustainability

The forest products industry's greatest attribute is that it is renewable, recyclable, and sustainable, ultimately creating low carbon products that are in demand throughout the world.  With countries looking to reach their Net Zero targets and investors placing greater emphasis on ESG factors, the industry is poised to play a leading role, offering environmentally beneficial products, new innovative technologies, and partnerships and engagement with local communities and First Nations.

The basis for the industry’s bright future is rooted in its raw material -- the trees. They capture carbon in the atmosphere as they grow, and once harvested and manufactured into wood products, the carbon remains sequestered for the life of the product. Researchers estimate that the BC forest products sector alone could account for 35 percent of the province’s carbon reduction goals by 2050.

As companies reforest harvested lands, the cycle of carbon sequestration begins again. In Canada, where two or three seedlings are planted for every tree that is harvested, forest cover accounts for nine percent of the world’s forest, but 36 percent of the world’s certified forests.

Whether managing provincial timber tenures or their own private timberlands, North American forest products companies go to great lengths to ensure their timber resources are managed and maintained in a sustainable manner.  For the vast majority of producers in North America, their sustainability is verified by independent, third party groups such as the Sustainable Forestry Initiative.


Innovations in Mass Timber

In recent years, sustainable mass timber projects have also increasingly found their way into the North American market. Tallwood House at Brock Commons, a student residence at the University of British Columbia, is one such example. An 18-storey tall wood structure, it was the tallest mass timber building in the world when it opened in 2017. Made from five-ply cross-laminated timber (CLT) - a prefabricated engineered wood product that is strong, lightweight, and can be made into all shapes and sizes -Tallwood House is an example of how wood can be used as an affordable and environmentally sustainable alternative in construction.

Mass timber buildings have been popular in Europe for some time, and are now finally starting to gain momentum in North America. With architects and builders getting on board with these types of building systems, the broad appeal is clear. And while building codes, permits and other regulatory issues will need to play catch up, the entire sector knows demand will increase in the coming years: there are over 600 projects in the design phase across North America.

Other mass timber projects going up across North America include newly constructed community centres, hospitals, university campus buildings, and other architecturally beautiful glass and wood structures.

Of note, the world’s largest retailer, Walmart Inc., is in the process of constructing a new head office campus in Bentonville, Arkansas that will utilize mass timber construction for its 18 buildings. At 2.4 million square feet of office space, this new campus is thought to be the world’s largest use of mass timber. In fact, Structurlam, the Penticton, BC-based company that supplied the CLT for UBC’s Tallwood House, has been selected as Walmart’s partner in this venture. In order to supply the Walmart project with locally-sourced southern yellow pine lumber, the company has also built a new production facility in Arkansas.

Mass timber construction is 25 percent faster to complete than similar-sized steel or concrete projects and has carbon emissions that are lower by 25 to 45 percent as well. In addition, mass timber construction has the added benefits of much lower noise pollution during construction and far less waste as ready built pieces are brought on-site and installed like Lego blocks.


New Inventions and First Nations Partnerships

Innovations within the sector go beyond large-scale efforts like mass timber, however, as consumers and companies move away from fossil fuels and single use plastics, the forest products sector is aiming to fill the void with more sustainable alternatives. Many forest products companies have been spending research and development efforts over the last 10-plus years exploring new product opportunities that could be created with biomass. These include various bio-material applications that could eventually displace products made from fossil fuels, nano cellulose applications, and biofuels. Arbios Biotech, a joint venture between Canfor and Licella, exemplifies the potential progress being made on this front. Arbios is focused on converting biomass to low carbon biofuel.

Another important focus in Canada is the critical role of Indigenous communities, particularly as sustainability becomes an increasingly important part of the forest industry’s future. The government has already laid some of the groundwork for companies to find ways to collaborate with First Nations groups, though what that engagement looks like can vary.  Western Forest Products on the coast of B.C. is perhaps the furthest along in its collaborative efforts, having created a number of joint ventures that give First Nations groups direct economic ownership in the timber that is harvested.


Extraordinary Times

Prior to the pandemic, the industry grappled with a number of ongoing challenges. The pine beetle epidemic that began in the 1990s has affected more than 18 million hectares of forest, resulting in the cumulative loss of 752 million cubic metres of pine that could have been sold, according to Natural Resources Canada. More than two dozen sawmills have permanently closed as a result. Western Canada, the Pacific Northwest, and California, meanwhile, have been hit devastatingly hard by record-setting forest fire seasons over the last three to five years.

The unanticipated and swift ramp-up in demand during the pandemic - at a time when supply was also tightening due to planned downtime and transportation disruptions meant pricing soared to unprecedented levels for a prolonged period of time.

As lumber companies look towards their post-COVID-19 future, it is clear that the pandemic has set the stage for accelerated changes within the industry. These have been extraordinary times for lumber and building product companies - with strong balance sheets, cash to deploy, and exciting innovations and developments unfolding or in the pipeline, the industry is expected to thrive in the coming years.

Steve Borritt

Steve Borritt
Managing Director, Global Investment Banking, RBC Capital Markets

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