April - June 2013
Reality Check: US Lumber Prices Off Highs After Supply Surge
PHILADELPHIA (MNI) - U.S. lumber prices are falling in response to a late, cold spring in some parts of the country, and to a sharp first-quarter production increase by mills that may have overestimated gains in housing starts, lumber industry participants said.
By early May, industry benchmark prices were off their highs for the year so far although much stronger than year-ago levels amid growing evidence of increasing demand for construction of single-family homes and especially multi-family buildings.
Prices may decline further before the inventory buildup is worked off but suppliers are expected to meet growing demand later in the year, resulting in prices that are likely to be little changed from current levels by the end of the year, experts said.
"We saw some over-production in the first quarter," said Mark Jaffe, president of Friend Lumber Co., which sells to builders, home-remodelers, and private customers in Hudson, NH. "People got excited, thinking they were going to have a heck of a year with big gains in housing starts. People thought that the price was going to stay up. It's going to take a little bit of time to work that off."
Jaffe said his sales declined in the first quarter as bad weather in the northeast cut construction activity but he expects the second quarter will be stronger than a year earlier as housing demand picks up, especially for single-family homes, his most important market.
Crow's Composite Price Index, a closely watched lumber benchmark, was $400 per thousand board feet on May 8, down from this year's high of $432 on April 5 but 31% higher than a year ago, according to Bob Berg, principal lumber economist at RISI, an information service for the industry.
Berg forecast the price will average $390 this year, little changed from its current level, as the inventory buildup is absorbed and mills meet anticipated higher demand later in the year.
Lumber producers will easily be able to supply an expected 9% increase in overall U.S. demand for soft lumber this year, resulting in range-bound prices that show little or no increase from where they are now, Berg predicted.
Many lumber mills started 2013 running below full capacity, and are now starting to add shifts and restart plants that were idled in response to the stalled housing market of recent years.
"Further gains in prices are going to be hard to get," he said.
In the construction industry, the biggest growth is expected in the multi-family housing sector where demand for lumber is seen increasing by 58% this year, driven by demand for apartments from people, especially the young, who can't get mortgages, are struggling to find entry-level jobs, or are burdened with student loans, Berg said.
But the strong increase in demand for multi-family housing doesn't necessarily result in commensurate gains for lumber sales because a typical single-family home uses about three times as much wood as does an apartment.
Lumber demand for single-family home construction is expected to grow by a more moderate 26% this year but to a level - 10.9 billion board feet - that's about 10 times the demand expected for the multi-family sector, according to the RISI forecast.
Berg said the group raised its single-family lumber demand forecast at the start of 2013 to reflect an upward revision in expected housing starts to an annual rate of 1.04 million.
Although first-quarter lumber production was vigorous, many mill owners have an underlying caution about the durability of demand because of doubts about the economy stemming from the continuing fiscal problems of the U.S. government, and growing signs of economic stagnation or slowdown in Europe and China, Berg said.
"They are optimistic but they are conservative," he said.
So far this year, demand for lumber hasn't matched mills' optimistic expectations, said Tim Cornwell, general manager of structural lumber for Blue Link Corp., a national distributor of building materials.
The recent increases in housing starts fanned a seasonal surge in lumber production that hadn't been seen since before the housing crash, and supply seems to have got out ahead of demand for now, Cornwell said.
"In 2013, the expectations for housing were euphoric," he said. "We had the first spring bought since the housing market fell, and the outflow hasn't matched what's being bought."
Prices for some grades of lumber have fallen by as much as 25% and could fall further before stabilizing, Cornwell said. "It's pretty ugly now," he said. "Building activity is strong but inventories are rising. We've got to work through these inventories before prices stabilize."
Some markets such as Texas and Florida have being doing well in response to recent warm weather but in many areas construction has been held back by cold, wet weather, such as in Denver which recently had a heavy snowfall, Cornwell said.
He said it's too soon to tell whether the industry will meet construction demand in the traditionally busy third and fourth quarter.
"The question is whether production will come to match demand at the end of the year," he said.
Shawn Church, editor of Random Lengths, a publication that tracks lumber industry prices and trends, said there's growing confidence that housing starts will hit around 1 million units this year, and that the lumber industry will meet that demand.
Year to date, U.S. lumber production is up 10% while that in Canada is up 5%, Church said. The Random Lengths Framing Lumber Composite Price, a closely watched industry benchmark, hit $396 per thousand board feet on May 3, down from its recent peak of $451 on April 5 but sharply higher than $329 a year ago.
"There is still plenty of optimism that the U.S. is going to produce 900,000 to 1 million housing starts this year," he said. "The big question now is whether the industry is producing enough, and it looks like it is."
The U.S. Labor Department is scheduled to release producer price data for April at 8:30 a.m. on May 15.
Editors' note: Reality Check stories survey sentiment among business people and trade associations. They are intended to complement and anticipate economic data and to provide a view into specific sectors of the economy.