Lumbering On: Growth Indicates Slowly Recovering Building Industry

Spend Matters welcomes a guest post from Robert Miles of Mintec Ltd.

US lumber prices have been lumbering on in a fairly choppy way since the start of the last quarter of 2011. There have been one or two slight hitches, but the latest posts look to have been hammered in -- in a reasonably positive way.

Trends in lumber are often seen as an indicator of economic growth. Nowadays, new homes being built in North America are picking up slightly, but we are a long way from the boom building days of five years ago. Since lumber is such an important part of construction, other large economies tend to rely on a healthy building industry at their heart.

Rising prices for lumber can be indicative of increasing industrial demand, as well as a pointer that there might be potential for growth in housing or the commercial sector. It is also suggestive of prospects in the longer term. Even if lumber prices are felled, buyers might be expected to return to the market in the hope of picking up a bargain, whereas if they go unsustainably high the whole log pile might be about to come crashing down.

US lumber prices were historically high in the first half of 2011 due to a rise in global construction and the anticipation that we might finally be emerging from the after affects of the worldwide recession in 2008/09. Increased North American exports were then seen due to the need for reconstruction after the devastating March 11th Tohoku earthquake and tsunami in Japan.

Prices slipped back, however, during the early summer of 2011, because China reigned back on its spending and limited monetary supply in order to curb rising inflation. Demand for construction (and hence lumber) in the US also traditionally sees a seasonal summer lull.

Prices subsequently rose in the third quarter of 2011 as regular business resumed in the fall. There were also reports of limited lumber supplies following the damage caused in the US by hurricane Irene in August 2011, which helped to bolster US demand.

The 2011 holidays (and better than anticipated demand due to the mild weather across much of the US) then put prices back on to a strong rising track. North American softwood lumber consumption in the first quarter of 2012 is reported to have been up 6% on the same period last year. One or two setbacks were seen at the start of 2012 amidst worries of a potential slowdown and double dip recession in the euro zone. There also remained a lingering concern that the growth of the Chinese economy could continue to slow.

With the approach of another potentially quiet summer season, there are reports of rising uncertainty about the prospects for the world's long-term lumber demand. Technical selling and speculative trading are also said to have contributed to these setbacks and declines.

US lumber prices however have recently been returning to their winning ways, and are currently 16% above their 5-year seasonal norm, rising due to reports of restocking by dealers following the 2012 Easter holidays. Increased transport costs in the US as a result of a hike in diesel prices were also said to have fed through into higher prices for US lumber.

As the US economy keeps lumbering on, and lumber continues to rise -- at least for now, this might definitely be one to watch in the year ahead!

- Robert Miles, Mintec Ltd.

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