Lumber and oil prices will remain elevated: Bison Interests’ Young
Lumber, which at one point was among the world’s best-performing commodities as the pandemic sent construction demand soaring and stoked fears of inflation, has officially wiped out all of its staggering gains for the year.
Prices at Monday’s close are now down 0.6 per cent for the year as demand eases and supply expands in response to earlier gains. The rally turned a common building product into a social media sensation and a flash point in the debate over U.S. monetary policy. At one point, lumber futures were trading as high as US$1,733.50 per thousand board feet, more than quadruple the level of a year earlier.
Lumber’s drop is among the most dramatic examples of the easing in commodity prices after rallies in raw materials from copper to corn earlier this year fueled concern that rising costs would undercut the economic recovery. U.S. Federal Reserve Chair Jerome Powell last month cited lumber’s decline as evidence that price pressures will cool as supply bottlenecks from the reopening economy are worked out and stimulus fades.
“The sheer expense has taken many people out of the market,” said Jamie Greenough, investment and commodities futures adviser for brokerage PI Financial in Vancouver.
Lumber for September delivery fell 5.6 per cent Monday to US$712.90 per thousand board feet on the CME.
Prices have declined on rising inventory levels and a “significant drop” in lumber demand at large retail stores, where do-it-yourself home renovators typically make their purchases, said Westline Capital Strategies Inc. Chief Executive Officer Greg Kuta, whose Ohio-based firm specializes in lumber-trading strategies. Lower renovations have made more wood available for home builders to buy, which has helped to pressure prices lower, Kuta said.
The market has even shrugged off more than 300 simultaneous wildfires and rail car gridlock in major producing region British Columbia in Western Canada.
Still the current price level is historically high. Since the 1990s, lumber futures have mostly traded between US$200 to US$400 per thousand board feet, with the exception of 2018 when they shot above US$600. This “massive corrective free fall” indicates the market is resetting to reflect supply-demand expectations for the rest of the year, according to Kuta.
Historically high prices for lumber threaten to keep housing costs high in North America for the foreseeable future. Lumber prices are undergoing a “paradigm shift” and are in the process of determining a new and much higher average price level as a result,” Kuta said.
“I think lumber futures prices will continue to see severe, two-sided volatility vacillating in a more extreme price range of US$550 to US$1,200 for the remainder of 2021,” Kuta said in an email. “But any attempt to break back above the US$1,000 level should be aggressively sold by lumber producers.”
Lumber prices could find a “near-term floor around US$700–US$800 before moving higher again ahead of the fall construction season,” citing “a very disruptive fire season” as a likely upside catalyst for prices, ERA Forest Products Research said in a June 30 note.
Paul Quinn, an analyst for RBC Capital Markets, said it is typical for prices to drift lower during the summer months, make a small rally in September, and drop again in November.
“We think 2022 spring prices will see a similar run as 2021, though likely not as high given the incremental capacity adds,” Quinn said, noting that new home construction demand is still accelerating. “We still expect prices will be higher than long-term averages going forward.”
--With assistance from Sophie Caronello.