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U.S. tariffs on Canadian lumber essentially a ‘tax on the U.S. consumer,’ analyst says

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Corton Capital Timber Analyst John Duncanson joins Yahoo Finance Live to discuss the spike in lumber prices and how it's affecting housing markets.

Video Transcript

KARINA MITCHELL: We're going to turn our attention now to the lumber market and its impact on sky-high housing costs, as housing starts slipped by more than 4% in January. For more, let's bring in our next guest, John Duncanson, timber analyst at Corton Capital. John, thanks so much for being here.

So the housing market's being pulled in all kinds of directions, right? Housing starts are down, mortgage rates are up. Mortgage applications are lower, all because demand is so tight. There is so little supply, and prices are sky high. And now lumber prices are exacerbating the situation because they've been on a rollercoaster all pandemic long. They were super high. They did dip. Now they're sort of creeping higher again, although slightly off some of those highs today.

JOHN DUNCANSON: Yep, it's been very interesting. We've had some good-- positive news, actually. Just going back to your housing start figures, yes, they were down in January. But I think that's largely probably supply chain and also weather. I think it's-- I can't think of any part in North America, or particularly in the States, where they didn't have some pretty severe winter weather. Nobody's looking at the building permits, so you didn't mention it either, but they hit a 17-year high in January. And so that's the precursor of future. So we're still in a red hot housing market.

Freddie Mac came out about a couple of weeks ago, saying that the shortage of houses in the United States is 3.8 million. So we're well behind where we should be. So on the demand side for lumber, I don't see any real slowing up. If we do get interest rates picking up a bit, which I hear everybody thinks, all that's going to do is try to squeeze more people that are on the fence into buying houses. So it's an interesting point.

The other thing you mentioned we talked about earlier was just the-- and you mentioned that the record high lumber price-- or the record high housing costs. And, you know, the National Association of Home Builders published just Tuesday that just the jump we've seen in lumber prices since they bottomed out last fall has added about $19,000 to the cost of the new home.

One thing that I always like to point out is that the Canadian lumber is a major supply for US housing. And the duties-- the ongoing trade war between Canada and the US on lumber imports, 30% of that 19,000 additional costs to host 30% of that, I calculate to be just the Canadian lumber duties, or the duties on Canadian lumber going into the States.

It's about 2-- it's close to $200 to $300, 1,000 board feet. So it's significant. And those-- the duty rates went up actually in November. First week in December, they went up to 18%. So one big solution if they want to drop the cost of a new house in the United States is negotiate with the Canadians and get rid of this tax because it's just a tax on the US consumer.

KARINA MITCHELL: Yeah, and I was going to talk to you about some of those regulatory issues and wondering what is the US doing to alleviate some of them because I understand from what you were saying, that, you know, the Canadian tariffs have been exorbitant and really sort of pressured the lumber market. So what's being done?

JOHN DUNCANSON: Well, nothing right now, because the Canadian producers are making so much money. I don't know if you saw the earnings. They're off the peaks, of course, from last spring, but they're still very much up there earnings wise. The other thing you got to remember, too, is that the duties aren't going into the US Treasury. They're being held in trust. So if there is a settlement, the money will come back to the Canadian companies.

And the other thing with all the very positive cash flows that they've generated over the past two years, despite the pandemic, a lot of the companies have absolutely no debt. So they don't have-- there's not a lot of pressure on them to reach a negotiated settlement, like they did back in 2006. They're just going to wait it out.

And the other thing, too, is that the formula for lumber duties, which is calculated by the US Commerce Department every year, is one of the key inputs is the price of lumber. And as the price of lumber goes up, the duties actually come down. It's about a two-year lag. So the 18% they're paying right now will come down to about 11% come the summer. So there'll be some relief there.

But-- and that's the other macro that there was news on yesterday, and I've been following this for quite a while. And I think when I was on your show last July, I mentioned it. There's a real squeeze on lumber capacity happening in Canada, particularly in British Columbia and the West Coast. Because we've got some-- we've had the beetle kill timber, and now we're getting regulatory reforms coming in that are actually going to reduce the annual allowable cut.

So we saw the first real indication of that yesterday when Canfor, the second largest lumber producer in North America, they've announced that they're shutting down one of their sawmills in the BC interior. Not completely, but they're going to remove one of three production lines. I estimate there's probably, because of the regulatory changes and the tightness in timber supply in British Columbia, there will probably be 10 or 12 more permanent closures.

So just as people think that things might be getting back into supply balance, supply-demand balance, you're going to see the supply really start to come off. And that will hold prices up. We're at $1,300 right now. That's at the mill. And I see a bit of pullback as we get into the summer months. But we probably won't see the $1,600 level we saw last May, but we're in 1,300 right now. So I'm looking at some pullback, but nothing more than maybe 15%. And then these mill shutdowns in Canada are going to keep the market extremely tight well into 2023.

KARINA MITCHELL: Yeah, it looks like it, and climate change and wildfires as well exacerbating things there. Great discussion. Thank you both so much for your time. We will have to leave it there. John Duncanson, timber analyst at Corton Capital, thanks so much for your time today.