‘Massive corrective free fall’: Lumber wipes out all its 2021 gains after record boom

Lumber, which at one point was among the world’s best-performing commodities as the pandemic sent construction demand soaring and stoked fears of inflation, has officially wiped out all of its staggering gains for the year. Prices at close on July 12 are now down 0.6% for the year as demand eases and supply expands in response to earlier gains.

Lumber’s drop is among the most dramatic examples of the easing in commodity prices after rallies in raw materials from copper to corn earlier this year fuelled concern that rising costs would undercut the economic recovery. Prices have declined on rising inventory levels and a “significant drop” in lumber demand at large retail stores, where do-it-yourself home renovators typically make their purchases, said Westline Capital Strategies Inc. Chief Executive Officer Greg Kuta, whose Ohio-based firm specializes in lumber-trading strategies. Lower renovations have made more wood available for home builders to buy, which has helped to pressure prices lower, Kuta said.

Dustin Jalbert, senior economist at Fastmarkets, which publishes industry newsletter Random Lengths, said there is pent-up demand among consumers desiring a semblance of a return to normal as they shift their budgets back where possible to travel, restaurants and sporting events – meaning repair and remodelling projects at home get postponed. “It links back to the pandemic to some degree and how it changed behaviour,” he said in an interview. “You can now entertain yourself outside the home and that kind of puts less pressure on doing those projects.”

What had been a huge imbalance between supply and demand in mid-May has shifted toward a lumber market that appears to be stabilizing, barring any unforeseen events. Lumber prices are expected to be less volatile in August after tumbling from record highs.

Still the current price level is historically high. Since the 1990s, lumber futures have mostly traded between US$200 to US$400 per thousand board feet, with the exception of 2018 when they shot above US$600. This “massive corrective free fall” indicates the market is resetting to reflect supply-demand expectations for the rest of the year, according to Kuta. Historically high prices for lumber threaten to keep housing costs high in North America for the foreseeable future. Lumber prices are undergoing a “paradigm shift” and are in the process of determining a new and much higher average price level as a result,” Kuta said.

Paul Quinn, an analyst for RBC Capital Markets, said it is typical for prices to drift lower during the summer months, make a small rally in September, and drop again in November. “We think 2022 spring prices will see a similar run as 2021, though likely not as high given the incremental capacity adds,” Quinn said, noting that new home construction demand is still accelerating. “We still expect prices will be higher than long-term averages going forward.”

Lumber surges again as wildfires snarl output, shipments

Lumber futures rose the most in more than a year on concern that wildfires in western Canada will reduce supply and spur more curtailments at sawmills. The rebound extends wild gyrations that took lumber prices from a record high in May on a pandemic-fuelled construction boom to an eight-month low during the week of July 12, after demand eased and supply was replenished. British Columbia is Canada’s biggest exporter of lumber to the U.S.

“We expect further curtailments in the next two weeks,” BMO Capital Markets timber and wood products analyst Mark Wilde said in a report, while noting that inventories at many producers are ample after months of rebuilding supplies.

Lumber for September delivery gained 7.7% to US$584 per thousand board feet at 11:24 a.m. on the Chicago Mercantile Exchange, the biggest percentage gain since April 2020. The price is still more than 60% below the high reached in May.

Rail transportation in British Columbia has been hindered since a June 30 fire damaged the tracks of the two main railways that carry goods to Vancouver for export, causing congestion at the port. Lines have since been repaired, but rail movement has been slow and sporadically halted due to fires.

The wildfires are not completely bullish for the lumber market, said Westline Capital Strategies Inc. Chief Executive Officer Greg Kuta, whose Ohio-based firm specializes in lumber-trading strategies. “The mills are all swimming in their wood now,” Kuta said. “We need to see takeaway increase dramatically in the secondary, end-user markets and export markets to right the ship in cash,” he said, referring to the need for wood to be shipped from producers to lumberyards. Sawmills will have a difficult time selling wood they can’t transport, and they need sales and shipments to flush out the existing high-priced inventory that is on the industry’s books right now.

Tumbling lumber prices are also “pieces of Canfor’s equation,” BMO’s Wilde said, noting the steep two-month collapse in pricing as do-it-yourself renovation demand has dropped by a reported 40% at big-box retailers. “At those levels, some B.C. mills may need a snorkel,” he said. “After a year of ‘chasing inventory,’ the market is now struggling with bulging inventories at many mills in the U.S. and Canada,” he said.

Source: Financial Post
Source: Financial Post
Source: Globe and Mail