Sawmills reduce production, shed inventory
Charlotte, NC – Bracing themselves for a tough 4Q2010 and 1Q2011, sawmills in the South began cutting production and shipping from inventory at the end of 3Q2010. Third quarter results from two of Forest2Market’s transaction-based services—the Delivered Price Benchmark Service, a performance benchmark based on market pricing data, and Mill2Market, a weekly lumber price report and benchmark—have been finalized.

The results show that revenue from sawmill residuals remained flat and the average composite lumber price fell by nearly 25 percent. At the same time, log costs fell just under 5 percent. By the end of September, shipment volume for southern yellow pine lumber increased as mills reduced production levels. Shipments remained higher throughout October.

Sawmill residual prices remained flat over 3Q2010 in spite of the end of quarter reduction in production. A reduction in lumber production would generally prompt a spike in residual prices. Because weather was dry, however, pulpwood supply was abundant, and paper mills substituted pulpwood, which kept residual prices steady. Southwide, the average sawmill residual price in third quarter was $27.46/ton.

Lumber prices in 3Q plummeted. According to Bill Nocerino, Manager of Forest2Market’s Lumber Division, “During the second quarter, weighted average composite prices for southern yellow pine hovered at $334/MBF. In third quarter, that price was $255/MBF, a 25 percent drop.”

“But if we look at the peak in second quarter, the difference is much more striking,” says Nocerino. Prices peaked at $392/MBF during the week of May 13. The 3Q trough occurred during the week of August 26 at $234/MBF. From peak to trough, prices dropped 40 percent. So far in the fourth quarter, prices are about the same as they were in 4Q2009.”

Log prices fell slightly in 3Q2010, by about $2.00/ton. Because of dry weather conditions, there was an increase in available supply. Pair this with relatively constant demand, and prices will generally fall. However, because seasonal weather patterns will tighten available supply, log prices are unlikely to fall much further.

“The end of the quarter trend suggests that mills are cutting production in hopes of balancing what they believe will be weakened future demand with supply,” said Nocerino. “They’re leery of carrying too much inventory and with good reason. The housing market shows only the most modest signs of recovery. And we’re moving into what is traditionally a slow time in the market with the holidays approaching.”

“The intention to run on a just-in-time basis makes sense in this environment, said Daniel Stuber, Director of Operations at Forest2Market. “In addition, while it is unlikely we’ll see additional closings, we may see some expanded holiday downtime, as is evidenced by Weyerhaeuser’s month-long November closing of its McComb, Mississippi mill.”

Will we see a return to the price run up that characterized last year? According to Stuber, probably not: “One reason is the state of the housing market. The long-term outlook doesn’t look good. The National Association of Homebuilders’ most recent forecast for housing starts calls for 605,000 total starts in 2010, 804,000 total starts in 2011, and 1,180,000 total starts in 2012.”

Forest2Market’s outlook for housing is far more pessimistic. “Based on the econometric models we run for our Economic Outlook, we don’t see housing starts cracking the 600,000 ceiling until at least 4Q2012, especially if the moratorium on foreclosures is prolonged,” explained Stuber. “Plus, we’re unlikely to see more tax credits for homebuyers, like the ones that caused so much of the fervor in the market this year.”

SOURCE: Forest2Market

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