If domestic and export demand for North American hardwood lumber both increase over the next six months, as expected, the hardwood industry may find it difficult to produce enough lumber because far fewer sawmills are operating than in the past.
And the industry has limited access to credit. Resulting price increases could be significant, which would be welcome news for sawmills that have been struggling with thin profit margins. The problem, however, is that rapid price increases—rather than gradual upward movements—could also drive away buyers, as has sometimes happened in the past.
Conversely, the industry could still fall into the overproduction trap in the longer term if credit eases, and sawmill owners mistake tighter supplies and higher prices for dramatically higher demand and, in turn, ramp up production too quickly.
The key will be for hardwood producers to accurately discern both the direction and magnitude of trends in domestic and export demand, and not to overreact.
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