Timberline believes that a bottom has or soon will form in the lumber market.
We believe that we will be at higher levels now through at least Memorial Day.
That is the take away, and you can stop reading right now or read on to see the reasoning that leads us to this conclusion.
By the way….no guarantees here!
Canfor (one of the remaining six major wood producers on the West Coast) announced Tuesday that they were closing several mills for at least 4 weeks with the net effect of reducing their output by 100 million board feet.
To put that in perspective this is the equivalent of 2,857 truckloads of lumber.
One might ask: With the price of lumber so high….and employees so hard to find why would a company furlough all of these people (who should not have a hard time finding another job) and reduce their output by $125 million dollars?
The answer to this is that Canfor, along with all of the major manufacturers on the West Coast, have finished product stacked up as high as it can go….a veritable “wall of wood”. Canfor can’t afford to buy more logs, and pay more people to turn the logs into lumber only to look at it sit…and as the weather gets warmer have to worry about mold growth under all of those plastic wraps.
From a supply view point this would ordinarily lead to lower prices.
The problem is transportation. Canfor needs on the average 30 rail cars a day to move all this wood to market…they are currently getting 2-3 with no sign of this improving at least in the short term.
This situation is mirrored in Eastern Canada except trucking is the issue rather than rail cars. Here the border, back hauls, and distance combine to limit the amount of wood available.
So supply is good at the point of manufacture but terrible where the wood is needed, with transportation being the bottle neck.
The current decline in the price of framing lumber and to a lesser extent plywood over the last few weeks comes about initially largely through weakness in the Southern Yellow Pine market. Southern Yellow Pine (as we have mentioned before) is often a leading indicator of market direction.
SYP is down dramatically in comparison to Eastern and Western Spruce, and typically this would lead us to look for lower prices in the Spruce market
The weakness in SYP comes from a variety of sources, but pressure treated is probably the most important.
SYP is the species of choice for treaters, and treaters have yet to (fully) make their traditional but of spring wood. The typical big orders from Home Depot and Lowes have not arrived. Last year at this time all of the big box buyers (and others) were concerned that they would run out like they did at the start of the Covid pandemic and were buying everything that they could. This year those same buyers are concerned that they are going to get stuck with a lot of high priced lumber line they did last year and so are buying much more conservatively. (this year with prices already high there has been push back from consumers at the big box level, prompting the big boxes to once again try to swing to the professional builder). Less demand is a key indicator of lower prices
The question comes: Why are the price declines so much steeper in SYP that they are in SPF? ….Once again transportation is the answer.
In the South the mill and the end user are geographically closer, so a trucker can make more trips and stay closer to home.. In the South the chance for a back haul from say Atlanta Georgia to Huntsville Alabama is much greater than from Boston to Sainte-Luce Quebec . There is also proportionally more trucks operated in the South…where winter weather is less of a problem than in Canada.
So we see production of lumber as good in all three major producing regions, but only in the South is the wood getting to the market in sufficient quantities, and as a result “supply” is making itself felt in the form of significantly lower prices.
As lumber rose dramatically during January and February ( defying seasonal norms) fear of a replay of the market demolition of last year surfaced, leading buyers to be cautious about inventory levels (see above about reduced treated purchases by big box stores).
When the market waivered direct mill buying came almost to a halt, and retailers turned to distribution for immediate needs. This after a period reduced distributor’s inventories.
At the same time we have the futures market…..promising wood for May delivery almost 20% below the cash market and wood for September delivery almost 35% below current cash. Why would anyone buy something today for 20% more than they would be able to buy it in May? Ordinarily this would be another indicator of lower prices. But remember…..the futures contract is only a performance to perform at a specific price at a specific time in the “future”. It has absolutely nothing to do with the cost in dollars of anything now…or in May or in July or in September…..the price of a contract can be “up limit” in a day…..three days from today the May contract could be above the cash price …without one 2×4 8’ actually moving from one set of hands to another.
Big picture….interest rates are up big time with mortgage rates up 1 ¼ points from the end of last year, traditionally this has never been good for home builders and leads to lower lumber prices.
Against this backdrop of indicators all saying that we are going lower, we have the following:
Seasonality:
Almost every year in the spring the demand for and actual usage of lumber increases. In the North we are coming out of the winter, in the South we have yet to get to crippling heat….it is a good time to build.
Competition for trucking in the South intensifies as produce starts to hit trucking. ….wood takes a lot longer to rot than a tomato….so farmers will pay almost anything for prompt shipping.
Ordinarily we would add poor spring logging conditions to this list, but this is a non-issue this year.
Activity:
We have seen good to record take away for the first quarter, with the forecast for at least the next quarter indicating high levels of activity.
This activity linked with the transportation issues outline above has led to lower inventories at all levels of distribution.
Interest rates:
The rate thing can be a double edged sword with consumers trying to get into homes before rates go any higher, producing a strong initial demand for housing prior to the longer term damping of demand.
Current inventories:
The fear of holding a lot of wood in the face of tumbling prices as seen last year cannot be overstated, and as a result, has produced low inventory levels throughout the chain of distribution. The recent retreat of prices exacerbated this, devastating inventories at the wholesaler level.
Last year “panic” buying produced high levels of inventory prior to the crash, the opposite is true today.
There is also “group think” or herd mentality at work, if you are a buyer, and no one else is buying…..
Transportation:
As disused above, a “wall of wood” in Canada doesn’t do anyone any good on a job site in Lexington MA. We don’t see this situation getting any better anytime soon, rather with rising diesel prices, and competition from farmers for flat beds, we would expect the situation to deteriorate further.
The net here is that all levels of distribution are under inventoried and under bought. The available supply though plentiful, is severely constricted by transportation. The rapidly approaching building season will place demands on current inventory levels that cannot be met, as distributors and retailers all attempt to bring in spring inventory at the same time. Prices will rise as competition for available wood increases. Again we feel that this scenario is good through Memorial Day….after that ….who knows?
