By Rod Nickel

WINNIPEG, Manitoba Canada's worst-ever spring wildfire season has forced its forestry industry to shutter sawmills, driving up lumber prices and setting production back for months just as housing construction has slowed due to higher costs and a tight labour market.

Canada has the world's third-largest forest area and is the second-largest softwood lumber producer, according to Canadian government estimates, making it a key supplier of a critical housing material.

This year's unprecedented fires have already consumed at least 4 million hectares, or 1% of Canada's forest, according to the Forest Products Association of Canada (FPAC), an industry group.

The fires are blazing through Alberta, British Columbia and Quebec, all provinces with active forestry industries.

The fires have also forced thousands of people to evacuate their homes and blanketed cities with smoke as far away as Toronto, New York and Washington.

Fires in British Columbia and Alberta have forced significant downtime at sawmills, and "ground zero" has now shifted to Quebec, FPAC CEO Derek Nighbor said.

"It's significant. Closing mills and having to restart them is a lot of work and that's people who have to be laid off temporarily," said Nighbor, who did not have an overall estimate of lost production.

Chicago lumber futures for July delivery have climbed 7% since June 1.

The unexpected disruption to the lumber industry risks further slowing new home construction, adding to Canada's acute housing shortage. Investment in residential building construction, after adjusting for inflation, fell in March to its lowest level since June of 2020.

Resolute Forest Products has temporarily shut four Quebec sawmills due to nearby fires and a related log shortage, Resolute Vice President Seth Kursman said. Workers were digging trenches near the facilities to suppress the fires.

Kursman said it was premature to say if the company may need to declare force majeure - unexpected circumstances that prevent a business from meeting contract obligations - or could make up the lost production later in the year. The closed mills mainly produce softwood lumber for North American markets.

SUPPLY CONSTRAINTS

Resolute has also paused harvesting activities in areas near fires.

Long-term damage to forests will require up to eight weeks to assess once the fires abate, Nighbor said.

"Is there anything that's salvageable? Is it younger trees that have been taken out or is it 60-to-80-year-old trees, because that will impact future operations," he said.

Wildfires can temporarily boost lumber prices as supplies are constrained and buyers increase inventories, although prices tend to revert later in the year, RBC Capital Markets analyst Paul Quinn said in a note.

Chantiers Chibougamau was forced to shut its Nordic Kraft pulp mill in Lebel-sur-Quevillon, Quebec after fire spread within 500 meters (1,640 feet) of it, but it expects to resume production this week, company spokesperson Frederic Verreault said.

Forest fires are partly a natural phenomenon, culling debris and creating new growth. But big blazes can also reduce timber supply for the long term, Quinn said.

Nighbor said as Canada's wildfires worsen, federal and provincial governments should allow for expanded tree harvesting, especially of older trees, to reduce fire risk.

Prime Minister Justin Trudeau's government has set a goal of protecting 30% of Canada's lands by 2030. About 13% is currently protected, Nighbor said.

"There's this sense in some political circles that protecting trees is going to be some solution for climate. We need to be looking (at forestry) through a fire lens," he said.

Forests can become more fire-resilient by thinning them of dying trees, prescribed burning and retaining tree species that are fire-resistant, said Michelle Ward, vice president at Canfor. The forestry company has not had to shut facilities due to fire.

The government will continue to protect natural lands, but responsible forestry practices can also support fire resilience, said Keean Nembhard, a spokesperson for the Canadian natural resources department.

Joe Foy, protected areas campaigner with the Wilderness Committee, an environmental group, said protecting communities from fire is better left to governments than forestry companies.

"Unleashing forest companies to build hundreds of kilometers more road to do more clear-cutting results in a worse situation, not a better one," Foy said.

(Reporting by Rod Nickel in Winnipeg, Manitoba; Editing by Paul Simao)