Natural Calamities Prolong the Strength of the Lumber Market
Forest Fires and Now Hurricanes
Help Prop Up Lumber Prices
Photo credit: NOAA Satellite, public domain
Many lumber analyst felt that the market would offer up a few “deals” this fall. They anticipated that the final determination of the Counter-Vailing Duty (CVD) would be delayed until the end of the year and the time period that Canadian lumber companies would be shipping wood minus the 19.88% CVD cash deposits, would extend from September through December. That duty-free four month period would have to put some downward pressure on a lumber market that had increased over 20 percent since the first of the year – an increase most blame on the U.S. – Canadian trade dispute. But just when the preliminary CVD was set to be discontinued in early September, creating that expected buying window, a series of natural calamities occurred that has propped the lumber market up and kept numbers elevated toward five-year highs. Of course, the calamities have taken the form of forest fires and hurricanes of historic proportions and have wreaked havoc on the balance of lumber supply and demand, stamping out, at least for the immediate future, any chance of a free-falling lumber market.
It’s as if our industry just can’t catch a break – first, Politics, then Mother Nature disrupt any natural balance in trading and the impact has sent lumber prices racing toward levels builders haven’t seen since April, 2013. Contract Lumber’s current commodity price index sits at $411 mbf. It started the year at $329, so the $82 increase represents a 25% escalation since early January. Panel products, in particular, have been strong all year. Oriented strand board for floor decking, roofing and wall sheathing, which can represent upwards of 38% of a lumber material package, has increased 40 percent since the beginning of the year. Unfortunately, hurricanes put added pressure on panel demand so do not look for significant relief in that product category in the next 60 days. Historical data after past hurricanes show that following any initial price swell, the true eventual impact on softwood lumber and panel markets will manifest itself gradually and could take years to unfold and may never be accurately measured. Several non-lumber building products to keep your eyes on that could be impacted by Hurricane Harvey in Texas include Asphalt Shingles and PVC piping. Many resin chemical and petrochemical plants were damaged in the flooding so analyst project potential price increases and shipping issues with those products. Also, expect the drywall market to experience upward pricing pressures and possible allocation issues with the amount of repair and rebuilding that will need to take place from Harvey and Irma.
Prices have also rallied higher throughout the year fueled by solid demand. While it’s hard to filter out the effects of the trade duty and natural disasters, building activity has been steady, especially in the single-family sector. July single –family housing starts posted a Seasonally Adjusted Annual Rate (SAAR) of 856,000 units, a marginal decline from the previous month, but a 10.9% gain above last year. Multifamily starts have been sluggish as expected in 2017, down 15.3% from June, and off 33.7% from July 2016, but activity in that sector is still historically dynamic. Combined housing starts stood at 1,155,000 SAAR in July. Analyst have now revised their 2017 housing forecast downward 4% to 1,227,000 SAAR. That would indicate that we are still in for a pretty strong finish to the building season for us to hit that number.
Housing demand fundamentals are still positive with a strong unemployment rate, low mortgage interest rates, and seemingly significant pent-up demand for purchasing a new home. But tepid wage growth and supply-side constraints such as shortage of construction labor, tight credit conditions, and low availability of affordable housing inventory, have squelched the housing recovery. The median price of a newly built single-family home hit a new all-time high in May of $345,800. Rising costs of lots, labor, and materials for builders will make it difficult to reverse that trend. This kind of home price escalation, when home price increases far outpace wage growth, is very concerning for the long-term health of the housing industry.
While the lumber market run that we have experienced this year will go down as one of the strongest in the last quarter century, it is arguably still not the biggest challenge builder’s face right now. Labor shortages pose a bigger hurdle to overcome than lumber prices. According to an NAHB Housing Market survey, 85 percent of home builders reported that they are experiencing subcontractor labor shortages, with framing and interior trim crews being the trades with the most severe shortages. It has become a constant struggle to find skilled crews and keep them staffed to the levels that match the pace of today’s fast-track construction process. Wages are improving but at a very slow pace and until these tradesmen can consistently earn a “living-wage”, it will be hard to attract new blood into the construction workforce. The Trump administration’s anti-immigration policies will put added pressure on getting homes built throughout this country.
In conclusion, expect lumber prices to show continued volatility through the third quarter and towards the year end. As key factors impacting the market come into clearer focus, we may get a sharper picture of just where the supply and demand equilibrium of this market will settle. Until then, don’t go to sleep on this market as you could wake up to a nightmare because things can change quickly.