Rising Lumber Prices: US Housing Starts Optimistic

Spend Matters welcomes a guest post from James Hutchings, at Mintec Ltd.

Earlier this year, we wrote about the prospective movements on the price of lumber, and the good news is that prices have continued to rise. We commented that trends in lumber are often seen as a good indicator of a US potential prospect for economic growth, so the latest activity might be a cause for optimism.

US housing starts rose by 15% in September to the highest level since July 2008, equivalent to an annualised rate of 872,000 homes. Starts reached a pre-recession peak of 2.1 million in 2005, the most in more than 30 years, before slumping to a low of 554,000 in 2009. Record low US mortgage rates and continued population growth has increased housing sales and indicates a potential continued recovery in construction. The number of households in 2011 grew by 2%, the biggest gain in 10 years, according to the most recent Census Bureau information.

Prices have been rising due to this increased demand, as well as from restocking. Increased transport costs in the US, as a result the continuing hike in diesel prices, have contributed to higher prices for US lumber while a mountain pine beetle infestation (which Spend Matters wrote about on Friday), said to cover an area up to ten times larger than previous outbreaks, has badly hit huge swaths of Canadian lumber output, from British Colombia through to some parts of Alberta. A beetle infestation will cut the amount of usable wood from 85 feet per 100 feet produced down to around 70 feet per 100 feet.

Indeed, initial estimates show that the US economy grew at a surprisingly high 2% annualised rate in Q3 2012, up from 1.3% in Q2 2012. A drop in the unemployment rate from 8.1 to 7.8% last month is another sign of accelerating recovery in the US. Demand and prices for US lumber have risen to an almost eighteen month high recently as a result, with prices now more than 30% up year-on-year.

We can look forward to continuing volatility and likely price rises in the lumber market over the next couple of years. Stocks are low and the tough market conditions that have faced mills over the last five years have led to a drawdown of their capital reserves. This, combined with the lack of affordable finance, will make it hard for them to react quickly to the market and accommodate any growth in demand, leading to a likely rise in prices. The high numbers of mill closures seen during the economic troubles will take time and money to get back online to meet any growth in demand. Logging and transportation infrastructure have suffered from lack of investment through the recession and will also be slow to respond to a rise in demand.

As we head toward the US elections, and the inevitable uncertainty this will bring, let us hope to see more solid good news emerge.

- James Hutchings, Mintec Ltd.

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