Spend Matters welcomes this guest post by Rajiv Joarder of Mintec.
Lumber is used in a variety of industries in the United States, but the price of lumber is primarily dictated by the health of the housing and construction industry. Americans may be viewing the economy more optimistically since last year, but their outlook on the housing industry is lagging somewhat.
The housing and construction industry has added nearly 48,000 jobs in December and 290,000 for 2014 – representing the largest annual increase since 2005. Despite this robust job growth in all sectors and signs of the economy picking up, there is still caution by the American population, given the nature of the long-term financial commitment that mortgages bring.
It is improving though. The number of mortgage applications for house sales in the US jumped to 23.6% in January, the highest level since September 2013. This was helped by the 30-year mortgage rate falling below 4% for the first time since May 2013. Moreover, in the US, there are more people in their early 20s currently than any other age group. They will be the biggest consumers in the economy – driving growth and job creation, which in turn will create confidence for first-time buyers to get into the housing market in the coming few years. With the labor market strengthening, more and more people are making big spending decisions. So why is the lumber price falling when there is increasing demand?
Lumber price in the US peaked in the first quarter of 2013 to $405/thousand board feet, up 42% year-over-year and the highest level since 2008. This was mainly to due high import demands from China. However, since 2013, the price has been at a steady downward trend due to falling demand from China as the growth momentum in the country weakens. Pushing the price down even further, European importers of lumber have been curbing imports from the US due to the weakness of the euro against the dollar. Consequently, the short-term lumber price has been on a downward trend for 2 years despite record high levels of new homes being built in the US in recent months.
It seems that the US lumber industry has not reacted fast enough to the falling demand from China and Europe, since there is currently a significant level of overcapacity of timber in the market. Timber harvest in the US has gone up for 4 consecutive years. Soft-wood lumber harvest was 5% higher in the third quarter of 2014 than the previous year. US lumber production in October 2014 totalled 2.8 billion board feet, up 7% from the previous month, according to the Western Wood Products Association's Lumber Track. This increase in production is likely to continue in the US in the upcoming months due to a number of sawmills being built and capacity increasing in the existing ones.
In addition, even with 1.1 million housing build starts, the US consumer faith in the long term health of the US economy has not picked up as quickly as the housing and construction industry had perceived. However, the easing of mortgage restrictions and new houses being built is expected to push the lumber price up again in the near future.