2016 Mid-Year Lumber Market Report
Lumber Market Heats Up with the Solid Building Activity
The lumber market has been grinding higher throughout much of the first half of 2016, even while housing data remained underwhelming during much of that time. Of the 26 weeks to open 2016, Contract Lumber’s Commodity Composite Price Index, posted gains 16 of those weeks. The index ended last year at $279.19 and currently sits at $340.61 – a 22% increase. It seems volatility has once again, crept back into the lumber consumers consciousness after several years of relative calm. For a 24 month period starting in mid-2013, the lumber market exhibited uncharacteristic stability, trading in a $30 range with an average CL Index price of $329. But starting in 2015, the market has bounced around with more traditional price swings of the $40-$50-$60 variety. What we all hope, is that the current run doesn’t turn into the $220 roller-coaster ride we all took back in 2012 and 2013. It was the initial stages of the housing recovery and the supply side, after spending years trying to right-size their production and inventory levels, just could not meet the uptick in demand and prices soared. Over a 63 week period starting in January of 2012, the lumber market spiked over $219 (90%), to a high of $464. Then it proceeded to plunge over the next 13 weeks, giving back most of those gains. Those kind of swings tend to test balance sheets as well as relationships in this business so we all hope that the supply/demand balance operates with some sense of stability in the coming years.
Many wood market analyst are predicting a strong second half with demand outstripping supply. Lumber prices will certainly bounce around as they typically do, but expect higher-highs, and higher-lows than we have experienced over the last three years. Demand is brisk across the country and what has many traders concerned is that pricing strengthened over the first half of 2016 even with post-recession record levels of U.S. lumber production and imports from Canada up over 40%. That combination, along with the lackluster housing numbers posted in the first half, have many thinking the market will remain firm through fall, a time when lumber has historically shown softness.
Producers have done a classic job of aligning supply to be level with (or just shy of) demand so far this year, enabling order files to build and prices to strengthen. They have had help from the just-in-time dealer buyers in the marketplace. Consolidation at the lumber dealer level has made JIT purchasing a necessity due to strained credit lines and lack of local control. The more often the buyer steps back into the market, the easier it is to keep upward pressure on pricing. Mills are pretty happy at current levels but at some point, greed will kick in and they will start overproducing (they always do) their goods, forcing prices to recede.
Lumber commodities are not the only building material putting pricing pressure on builders and contractors. Many products regularly used in residential and commercial construction have seen multiple price increases already this year, including drywall and roof shingles. Commercial contractors have been especially hard hit by raising steel stud prices. The major producers have enacted and announced increases totaling 45% since the beginning of the year. Look for additional increases on composite products and engineered lumber moving forward.
Builders should be updating their pricing quotes on a regular basis. Many dealers are said to be shortening their quote durations due to the fast moving market and most mill lead times are out well into late August. Steady consumption is forcing buyers back into the market with regularity and when they do, they are finding replacement costs are climbing. At least for the short-term, lumber commodity prices have considerably more upside than downside potential.