Are Lumber Prices Too High?
By Chuck Ray | Posted: 04/18/2013 12:01PM
That certainly is the sense I'm getting from the lumber-using community. Just when it looks like business is starting to pick up, softwood lumber is going up faster than any other commodity out there. And hardwood lumber is starting to pick up steam as well.
Rich Vlosky down at LSU recently sent out the following news item:
Lumber Prices Skyrocket to 8-Year Highs on Housing Recovery
Apr 11 2013, 17:49
Content Provider: Seeking Alpha
Author: Mark Perry
Thanks in large part to the U.S. housing recovery and an increased number of housings starts, framing lumber prices skyrocketed last week to $451 per 1,000 board feet (see blue line on chart below). The last time framing lumber prices exceeded $450 was back in September 2004, eight and a half years ago. CME lumber futures contracts fell by $11.40 last week to $379.80, but have been trading in recent months at price levels not seen since the spring of 2005, eight years ago (see red line on chart).
Looking just at these trends, you might think that lumber prices are approaching historical highs and are due to come down sometime soon. The downward movement on the futures market alluded to above seems to indicate that at least in the short term, lumber prices are softening somewhat.
But I think the good news for the lumber producers, and the bad news for lumber users, is just getting started. Why? Look at the chart I've compiled below:
I've plotted lumber prices (the red line is the Random Lengths structural lumber composite, the green line is a price trend for Economy grade 2 by 4 on the West Coast) from 1995 along with a trend line that represents what the prices would be if they had increased by the rate of inflation since then. You can see that the economy grade softwood is currently over the inflation-adjusted price, which means that particular market is stronger now than it was in 1995. Coincidentally, the Chinese have begun transitioning from higher grades of North American lumber to lower grades in order to cut their costs as lumber prices started to move upward. Cause/effect.
However, the Random Lengths structural index is still well below its inflation-adjusted rate, which would be around $512/mbf today. That means that the structural grades are still not as high in real dollar terms as they were in 1995. Which also means that they could, and should naturally, go higher still.
And even more fuel for the lumber price fire is provided when you look at lumber prices relative to housing starts. Look at the end of the red and green lines and trace back to the last time prices were at this level...around 2004, as the article quoted above tells us. Then look at housing starts around that time...they were above 2 million...compared to just over 900,000 today.
There are many reasons lumber is higher relative to housing starts than it was back then...many lumber mills have shuttered and/or consolidated in the past five years, the western pine beetle's impact on lumber recovery in Western Canada, reduction of the allowable cut in Eastern Canada, and not the least of which, China's entrance into the North American market in a big way in the past five years. And now, the slumbering U.S. housing market is starting to awaken...well, maybe. You can see in my chart above that housing starts are just now approaching historical lows...from the bottom. And the data from the last couple of months hint at a cooling trend. Will it pick up again? Or has the run up in the last year been a false rally spurred by short-term federal policy? Only time will tell.
But one thing is for sure...with all the other prevailing conditions mentioned above, if the housing market continues any kind of increasing trend at all, lumber prices must surely break through and establish new historical highs.
It all depends on the global economy. If things continue to hold up, lumber companies will do very well, perhaps turn in historical profits for a few years. And lumber users will increasingly feel the pinch in the cost of raw material.
But if economies in Europe continue to crash, and drag down the rest of the world, lumber will get cheap again. But lumber users won't really care, then, will you?
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About the Author
Chuck RayDr. Charles D. “Chuck” Ray is Associate Professor of Wood Operations Research at Pennsylvania State University. His specialty is in the area of operations research, specifically those operational issues that confront the majority of the wood products sector. He previously spent 15 years in research and quality management for two large building products corporations, Temple-Inland Forest Products and Louisiana-Pacific. Ray is the sixth generation of his family to work in the sawmill industry, the Ray Brothers Lumber Company, established in East Texas before the turn of the last century. He can be reached at firstname.lastname@example.org and followed on Twitter @ChuckDRay. He maintains an Extension website for Penn State at http://extension.psu.edu/woodpro and also writes a blog on all wood issues called Go Wood which can be found at http://gowood.blogspot.com.