Inflation’s Impact on the Sawmill
Canfor is one of the largest producers of lumber in the world, with operations in British Columbia, Alberta, Sweden, and the U.S. Here in the U.S., we operate 12 sawmills across the southern states and currently building our 13th lumber operation in DeRidder, LA. The last few years during the pandemic have been challenging for our employees and our mills, and the resulting effects of inflation have added to those challenges. When looking at inflationary challenges within our business, you can put most of them into three buckets: People, Supply Chain, and Mill Equipment.
In our operations and across all company functions, we have had to increase employee wages in order to keep up with inflation while also working to attract a new generation of skilled workers to replace the aging workforce we are experiencing in our manufacturing facilities. Our people have always been a key focus for our company, but now more than ever, attracting and retaining skilled workers is the major factor in our ability to sustain and grow our operations.
Of course, we are all feeling the effects of inflationary pressures that have hit our supply chain.
Our logging and trucking force is dealing with high diesel fuel and equipment costs, long equipment lead times, and a need to attract and retain new members to their workforce as well.
We have worked to try and help our logging and trucking contractors keep up with these increased costs, both through raising rates and by creating efficiencies wherever possible from the stump to the mill, a lot of times putting priority on the contractor over mill deliveries. As a result, we have seen our raw material cost increase substantially over the last year.
We have also experienced increased costs associated with transporting our finished lumber to our customers, most of which move by truck and can be directly tied to the dramatic increases we saw in diesel prices earlier this year. Regardless of these cost pressures, we have to continue to react to the needs of our logging and trucking contractors as our operations expand and demand more consistent movement of our raw materials and finished products.
In addition to inflationary pressures on our people and the overall supply chain, we have also seen significant increases in mill equipment costs. Those increases are primarily associated with the rising cost of steel and labor.
As we implement plans to grow our operations and make them more efficient, we have seen total new equipment costs rise by an average of 15%. When considering a multimillion-dollar project, the added cost can be considerable.
We have also been disrupted by longer lead times on equipment deliveries and installation, as those contractors are dealing with some of the same supply chain issues mentioned above. Our greenfield sawmill built in DeRidder, LA, is a prime example where the cost of that mill today is substantially higher than what it was just 3-4 years ago. The increased cost and longer lead times for these types of projects make finding the return on future projects much more difficult.
All of this said, we have been fortunate in that the same inflation that is driving up our manufacturing costs has also increased the price of our lumber products. This has certainly given us the ability to react appropriately to the rising costs we have experienced and allowed us to continue to invest heavily in our operations. Now we are seeing the effects of that same inflation and the associated rise in interest rates to combat it begin to affect the housing market negatively and, in turn, the price of lumber. It will be our challenge going forward to work with what we expect to be lower lumber prices with a continued increase in our manufacturing costs, tightening our margins. We need to continue on our path to increase the efficiency of our mills through investment and strengthen our workforce and supply chain to be successful. This will allow us to provide a consistent market for pine sawtimber and deliver sustainable lumber products for our customers well into the future.