Spend Matters welcomes this guest article from IHS.
Spot lumber prices, as reported by the industry publication Random Lengths, headed lower in the final months of 2014 before tumbling in the first 4months of 2015. At the end of April, spot spruce pine fir (S-P-F) 2x4 #2&Btr mill prices stood at $249 per thousand board feet (mbf). Last year in April, this figure was $367/mbf.
The volatility in lumber prices can be traced back to changes in the demand and supply drivers. On the demand side, new home construction continues to present its unpredictable trend. After dipping 7.6% in quarter-over-quarter (q/q) terms in the first quarter because of weather conditions, total US housing starts are expected to grow 13.4% q/q in the second quarter. According to the Commerce Department, US housing starts advanced 22.2% in April and contracted 11.1% in May in month-over-month terms. Despite the volatility, the trend is moving in the right direction, which will support lumber prices in the near term. Looking at the demand from overseas, one can note the exchange rate effects as well as dwindling demand from China and Japan. While the US exports to China and Japan fell sizably in the first 3 months of the year, Canada was able to increase its exports due to better exchange rate conditions. Nevertheless, falling Chinese imports has been another demand factor that has helped pull down prices since the beginning of the year.
Throughout the first quarter and so far into the second quarter, we have seen slowing US lumber production paralleling the slower housing-market recovery. Despite the decreasing production, US total lumber supply increased modestly in the first quarter with the surge in imports and a contraction in exports. Because of tumbling prices in the first quarter, there have been several reports of temporarily idled mills on the West Coast and US production levels slowed down. As the price recovers in the second quarter, production will also begin to increase in the United States, making up for the slower imports.
US lumber producers remained fairly optimistic in the first quarter as they continued hiring modestly despite the lower prices and some idling production. In year-over-year terms, employment in logging increased above 4% since February. However, this escalation should not be perceived as large because employment in the logging industry is still getting back to its pre-recession levels. The month-over-month (m/m) view of the data reflects the production picture in the United States better. Since March, m/m employment growth has been hovering slightly over zero or falling. This is in line with employment in the overall wood production industry, where m/m employment growth has been falling.
Bottom line: Buying conditions for lumber are shifting in favor of sellers. This shift in pricing leverage depends heavily on how quickly homebuilding ramps up in the next few months. If construction activity accelerates as it did during April, we should expect to see prices quickly recovering from the spring lows. If construction activity fails to accelerate, as it did 2014, we are likely to see mills struggling to push prices.