Lumber Price Reversal: Are the Bottlenecks Promptly Resolved for Good?

Lumber futures fell 18% this week and ended Tuesday at $1,009.90 per thousand board feet, down 41% from the record of $1,711.20 reached in early May, in the biggest weekly decline for front month futures in records going back to 1986, as analysts say buyers are procrastinating eyeing still historically high prices and awaiting additional supplies to normalize the market. In the same tone, The Wall Street Journal suggested that for the building construction industry the worst is probably over. “Lumber prices are falling back to earth” - the article said.

“Cash lumber prices are also crashing” - further pointed out in the article. The so-called Random Lengths framing composite index, which tracks the spot timber sales, dropped 9.2% to $1,324, its biggest ever weekly decline. The U.S.’s National Association of Home Builders said at one point that the lumber price rally has added $36,000 to the average price of a new home since April 2020. They've also added $119 more a month to rent a new apartment. But sawmills have increased output (+5% over the last year, and another 5% increase is expected down the road). Interestingly, since the early '90s, lumber futures have traded in the range between $200 and $600 per thousand board feet most of the time, so what is happening is really a big deal!

Indeed, lumber prices became the reference point to the endless transitory vs. protracted inflation debate. Meanwhile, U.S. home builders raised prices, but many outright suspended all construction or selling activities as mispricings led to selling many new homes at a net loss.

But the narrative tone then suddenly changes: “Lumber producers and traders expect that prices will remain relatively high due to the strong housing market, but that the supply bottlenecks and frenzied buying that characterized the economy’s reopening and sent prices to multiples of the old all-time highs are winding down”.

According to FAO (U.S. Food and Agriculture Organization), the productive and available forest lands in North America contain about 46 800 million cubic meters of timber, almost equally divided between the United States and Canada. However, only 34 percent of United States productive forest land (~69.7 million ha) is rated as high productivity land.

The lumber industry has struggled to recover ever since the 2008 housing bubble, and a series of economic, regulatory, and, most importantly, environmental issues have further hurt it. In the U.S. and Canada, many sawmills closed up simultaneously or otherwise adjusted operations downward; reportedly, 2019 was a bad year for lumber in particular.

According to Vox, in the spring of 2020, being afraid of an ongoing slump of demand, many wholesalers sold off inventory and scaled down operations. However, as it became increasingly clear that the pandemic might not be such a disaster for the sector after all, it took the industry unprepared for both wood’s upstream and downstream challenges.

According to Forrest2Market, it’s important to understand the delicate relationship that exists between demand for forest products and the capacity to manufacture them. Raw timber costs can comprise upwards of 75% of total operating costs for forest products manufacturers, so uninterrupted logistics and wise management of those resources ultimately define success.

The bottomline is that the lumber price drama looks resembling the microchip shortage story in the semiconductor sector. It entails both raw material and wood processing capacity constraints, as well as impaired due to the Covid restrictions shipping part of this complex business, while imports became next to non-existent. Although many believe the lumber industry bottlenecks will be ultimately resolved, it may take a lot longer than today’s lumber robust price reversal suggests.