2 weeks Ago
sockagphoto/iStock via Getty Images I continue to be baffled by the extent to which pandemic supply chain interruptions and the zero interest rate environment demolished equilibrium across just about every industry. Lumber is yet another industry to be thrown into disarray as the rapid changes flung it into extraordinary profitability in 2021 and 2022, followed by oversupply and struggle in 2023 and 2024. In 2025, lumber is finally approaching a restored stabilization, but the different ways in which companies pivoted during the boom and bust will have long-term implications on future profits.
Weyerhaeuser Company ( NYSE: WY ) has focused on internal operations, improving efficiency, vertically integrating the entire supply chain, and finding supplemental revenue sources to make their assets multipurpose. I believe their approach was superior to that of peers and has set them up for a dominant share in the North American lumber and wood products market. Key topics to be discussed in this article: Lumber supply chain and demand in the post-pandemic era Expanding supply chains to meet higher levels of demand Demand drop-off as mortgage rates curbed home building Newly increased sawmill production was too much for lower-demand environment Inefficient operators struggled Efficient operators were “black at the bottom” Weyerhaeuser’s superior margins allowed it to not just keep its mills open but to expand operations Many sawmills have closed, reducing the supply of lumber Lumber demand is rising back up as home building persists despite mortgage rates Lumber demand now exceeds production due to mill closures, resulting in a sharp rise in lumber prices WY is growing while competitors shrank has resulted in a dominant market share in the U.
S. and North American lumber market Former and potential timber tariff impact on supply chains and profitability. It is a fair bit of data to discuss, so let’s get to it.
Lumber supply chain and demand in the post-pandemic era During the lockdown portion of the pandemic, people turned toward home improvement, with a substantial uptick in renovations. This took a dent out of inventories of lumber and other wood products at a time when production was partially disrupted by pandemic protocol. Coming out of the pandemic, extremely cheap mortgage rates of around 3% suddenly made homeownership more affordable.
tradingeconomics New home construction surged to an annual pace of around 1.7 million starts. tradingeconomics Lumber supply was not sufficient to handle the sudden demand, and with COVID protocols still in place, it took longer for mills to adjust production levels.
The mismatch of supply and demand caused lumber prices ( LB1:COM ) to spike to unprecedented levels. tradingeconomics Every lumber and wood products producer was suddenly wildly profitable. The industry as a whole began to expand its capacity to meet the higher demand and to capitalize on the extreme profitability.
Demand drop-off However, just as the additional supply capacity was coming online, mortgage rates shot up to 7% and housing starts dropped to 1.3 million from 1.7 million (see graphs posted earlier).
The opposite dynamic took hold. Now there was too much lumber produced and not enough demand. Large portions of the lumber industry began to suffer.
Less efficient operators began to hurt Large lumber producer Canfor (CFP.UN) saw its profits turn negative. S&P Global Market Intelligence Earnings went from $8.
57 per share in 2021 to negative $4.12 per share in 2024. EBITDA dropped from over $2B in 2021 to negative $124 million in 2024.
It was unavoidable. The wood products that were previously sold at extremely high margins were now selling for about half the price. Canfor’s downturn was representative of most of the lumber industry.
Even the gigantic West Fraser Timber ( WFG ) turned negative in earnings per share. S&P Global Market Intelligence It did manage to stay positive on EBITDA at $673 million. Only those with the leanest operations were able to turn a profit in the unsustainably low lumber prices of 2023-2024.
WY managed to retain positive AFFO/share and EBITDA of $1.29B in 2024. S&P Global Market Intelligence It has long been the margin leader in the sector due to internal focus on operational efficiency as well as proprietary wood products that command premium pricing.
A significant contributor to WY maintaining profitability through the downturn is their vertical integration and supplemental revenue streams. WY owns the timberland that feeds their mills and gets additional revenue from that land in the following ways: Leasing for camping/recreation Solar leases $100 million lease from Occidental ( OXY ) for subterranean geological space Land sales at a high value per acre for a real estate development Mineral rights Passive land appreciation (not cash but a real gain). Weyerhaeuser prides itself on being “black at the bottom,” which is a refrain on just about every earnings call and conference appearance, meaning that the company stays profitable in the troughs of industry cycles.
This profitability and retained cashflows allowed them to expand operations while the rest of the industry was shrinking. WY recently announced a $500 million investment in a TimberStrand facility in Arkansas. TimberStrand is a special type of engineered wood product .
“The company announced plans to invest approximately $500 million in a state-of-the-art TimberStrand facility in Arkansas, with construction starting in 2025 and operations expected by 2027. The facility is anticipated to generate over $100 million of annual adjusted EBITDA” $100 million annual EBITDA on a $500 million investment is a great ROIC. One of the aspects that makes TimberStrand a higher margin than other wood products is that, unlike veneer which requires large continuous lengths of quality wood, TimberStrand is pieced together from smaller pieces.
This means they can build it from pulpwood that would normally be sold at a very low price per ton, rather than having to use much higher value saw logs. A $500 million investment from a company the size of Weyerhaeuser is not all that large, but I think it is notable because of the difference in direction from the rest of the industry that is broadly closing up shop. Lumberbluebook reports a litany of mill closures .
Lumberbluebook Interfor ( OTCPK:IFSPF ) is cutting 15% of production . We attempted to summarize the mill closures into a table, although admittedly some of the information is unknown, leaving blank cells. 2MC gathered from various sources These closures span from British Columbia and the Pacific Northwest to Southeastern states like Florida, Georgia, and South Carolina.
They represent a significant portion of overall lumber production. Total North American lumber capacity in 2024 is estimated at 76.59 billion board feet.
Forisk The Canfor closure of Plateau and St. John alone represents close to 1% of North American capacity. In total, the mill closures have taken a large chunk out of lumber capacity.
The industry is now producing an appropriate amount for the recently subdued demand of housing, starting at around a 1.3 million annual pace. Housing shortage and rebound in home building The housing shortage in America is well known and discussed ubiquitously, with varying numbers usually ranging from 4 million to 7 million homes short of what we need.
Compounding upon this problem is an aging inventory of existing homes, which increases the number of homes that need to be built each year just to make up for demolitions/rebuilds. So, the 1.3 million annual pace is broadly considered to be not enough to meet demand.
It is well below historical norms and likely the result of sticker shock from the 7% mortgage rates at a time when people have become accustomed to 3% mortgages. However, as time goes on and mortgage rates remain stubbornly high, people are getting more used to the idea and home builders are getting more clever about working around the sticker shock with things like mortgage rate buy-downs. In recent months, there has been a rebound in housing starts back up to the 1.
5 million paces. tradingeconomics 1.5 million is a sustainable pace, and perhaps even on the low end of what would be a historically normal pace.
After closing so many mills, the lumber industry is not quite ready for this level of wood product demand. Lumber prices have jumped from the low 400s back in July to 678 today. tradingeconomics I marked January 30 th ’s price of $573 on the chart above because that is the date on which WY gave its earnings guidance.
I suspect they will experience a significant beat over guidance, as lumber prices are now more than 100 points higher than they were at the time guidance was presented. Back to the bullish part of the cycle The cycle has turned once again to being favorable for lumber producers. With lumber prices in the 600s, most sawmills should be able to turn a nice profit.
WY will get to experience greater benefit than peers because of its outperformance in the downturn of the cycle. While others had to close mills and reduce production, WY’s superior margins allowed it to expand operations. It is now the number 1 producer in the U.
S. and #2 in North America. Forisk Tariffs and duties—impact on WY There is a longstanding conflict between Canada and the U.
S. with regard to lumber. Various portions of the U.
S. government have suggested over the years that Canada’s lumber industry is subsidized, and this has frequently resulted in the U.S.
placing either duties or tariffs on imports of Canadian lumber. The National Association of Homebuilders is opposed to lumber tariffs as they make home building marginally more expensive, but they still put out decent information as to what is going on: “The prospect of 25% tariffs on Canadian products, which include softwood lumber critical to the U.S.
homebuilding industry, would be on top of the existing 14.5% lumber tariffs previously imposed by the U.S.
Department of Commerce. This means that tariffs on Canadian lumber will surge to 39.5% on April 2.
” The 14.5% duty on Canadian lumber was put in place by the Biden administration in 2024. Trump, as of today, intends to add more tariffs on Canadian lumber, which as NAHB points out, would take the total tariffs/duties to about 39.
5%. That is a number sufficient to strongly discourage imports of lumber. Roughly 25% of the lumber consumed in the U.
S. comes from Canada, so what will happen to fill the gap? Well, the United States has plenty of trees to service our domestic needs. Timberland acreage has actually grown over the last 100 years, now sitting at 2.
26 billion acres. Forest Service USDA.gov The U.
S. South in particular is a wood basket with ample supply. The timberland capacity is absolutely there to service our domestic needs.
The challenge will be in the milling capacity. It takes a long time for new mills to open up, and given the recent downturn, some of the major players may be hesitant to spend the roughly $200 million it takes to greenfield a new build. Thus, in the short to medium term, additional demand will have to be serviced by existing mills running an extra shift.
This will likely not be entirely sufficient, which I anticipate will result in lumber prices further increasing if home building remains at a 1.5 million pace or above. In my more thorough tariffs article , I discussed the impact of tariffs on WY specifically.
“Weyerhaeuser Company ( WY ) is a mixed bag as its domestic sawmills would increase in profitability, but WY also has some Canadian operations which would be harmed by the tariffs.” I have since learned some more information that leads me to amend this statement. Only 20% of WY’s lumber is produced in Canada and only 20% of that is exported to the U.
S. Thus, only about 4% of WY’s overall lumber production will be negatively affected by tariffs. The majority, which is produced in the U.
S., should benefit from higher prices on lumber and thus higher margins. As such, tariffs are overall quite beneficial to WY from an earnings standpoint.
Valuation Weyerhaeuser is trading at about 74% of net asset value, which is a similar discount to its timber peers. I think the market overreacted to the strength of 2021 and 2022, bidding the timber REITs up to rather high prices, and has since overreacted to the 2023-2024 downturn. In cyclical industries, I prefer to take a more long-term approach and average across the cycles.
In the last 7 years, Weyerhaeuser has averaged just over $2.3B EBITDA. That spots it at an EV/EBITDA under 11X.
Forward EBITDA is likely to be higher than the last 7 years because WY has gained market share and grown its asset base. Forward EV/EBITDA is likely under 10X. I find that quite compelling for the market share leader with industry-leading margins.
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