Lumber prices, over the past few months and 2020, have been in turmoil. While it might show an all-time high at one point, the next quarter can see the European and US lumber price dropping down like anything. Mid-July 2021 saw the price of the finished SYP (Southern Yellow Pine) lumber tumbling over 65% from the record high ($1,600 per 1,000 board feet) that it had reached simply 9 weeks ago (in May).
From then, prices have been noted to bounce back a bit, but the movement has been muted over the past few weeks if you compare it to the volatility seen most part of the year 2020. The August 27 week saw a SYP lumber composite at $426/MBF (2.5% decrease from the $437/MBF the week prior). The new floor price has seen a stability in the supply-demand relationship and it seems to be around the +/- $400/MBF range (as per data derived from Forest2Market). From this point onwards, it is difficult to say for certain how long (and if) the equilibrium will last. If you look at the lumber price forecast closely, you will find that the future contracts have dropped more than 70%.
What Exactly is Driving the Drop in Prices of Lumber?
The disruption in the supply chain happening in the first few days of the COVID-19 pandemic had left a deep impact on the lumber industry, in general. The lumber producers and sawmills cut back on manufacturing and production as they thought that they would have to settle for the long downturn.
Sawmills also had to cope with the virus impacting their own staff as it forced them to either close or work with a reduced headcount. So much so that the mills present in both Canada and the United States had faced trouble staying open, even. To think of it, when the pandemic hit, even steel prices took a hit and with the similar labor and manufacturing disruption as lumber, still managed to increase by around 75%. Concrete, on the other hand, remained stable throughout the time and had only a 6% to 8% increase in price.
However, with time, unexpectedly, homebuilding saw a new uptick. The younger generation working from home was able to save a lot more than anticipated, thereby rendering them capable of buying their first home. In addition to that, the historically low rates of interest made buyers take out mortgage loans. Right now, the house construction market is starting to level off. This means that most sawmills are coming back to the pre-pandemic production levels as well.
So, Will Lumber Prices Go High Again?
As mentioned above, the lumber market has been extremely unstable for the past 18 months because of the coronavirus pandemic and the fact that there has been too much noise for the market to achieve that equilibrium state. Having said that, the record-high housing prices are now creating a roadblock for those who are buying a home for the first time and this has ultimately slowed the pace of growth.
If you take a look at the US and European lumber price data over the past few weeks, you would see that the demand from the expanded mill inventories and decreasing or flat demand from the home construction side have materialized a market that is attuned to the current needs. In the past 12 months, the market has seen an inflation in production where North America had to add around 1.4 billion board feet capacity. The second half of 2021 will also see an additional 1.6 billion board feet capacity addition online (as per a report by the Forisk Consulting in June). This should, in turn, limit any extreme price reactions in either direction and provide the stability much required in the market.
Lumber, however, remains more prevalent in the residential market even today. The average cost of a new home, for example, has increased by $36,000, only due to lumber costs. The commercial contractors, however, are able to lock-in favorable prices on commodities. Even with longer-term pricing, the current market cost of a commercial project is running at a double normal inflation of 6.5% to 7.5% rather than the 2.5% to 3.5% we’re used to seeing.
According to statistics, there is a positive setup for the traditional seasonal trade where the shares might bottom around mid to late October before anticipating the upcoming building season. The demand for wood products, ultimately, will rise when the homeowners come back from their summer holidays and start home renovations. Drought conditions or fire danger in dry conditions also might adversely increase the lumber price and slow down the production rate.
By referencing the lumber price data from 2020, we can find that the prices had crashed in September and October before coming back high in the 4Q-2020 and finally skyrocketing in the 2Q-2021. This happened because the global economy was coming out of the lockdown phase, and thus the growth only had to go up and not down. However, let’s be honest, 2020 was different and an unforeseen circumstance that might not be repeated anytime soon. So, at the end of it all, there is nothing but a high hope that the price will maintain steady growth in the future and reach the $500/MBF to $600/MBF range.
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