Lumber future prices have risen dramatically in recent months reflecting a significant pickup in the construction industry for new homes across the US.
In the aftermath of the global recession of 2008, the beleaguered state of the US housing market plunged North American lumber production to its lowest levels since the 1980s.
It’s now five years on and the industry has been showing signs of rebounding. According to a recent article in Financial Times, US lumber prices are now nearing an eight-year high.
Three major factors are said to be contributing to this increase:
1. Increasing Demand for New Homes from US Homebuyers
After several years of the US government implementing various forms of stimulus and economic measures, the housing industry is now showing signs of recovery. New home sales and home-price indexes published by the National Association of Realtors have shown a higher sales pace compared to last year. New homebuyers are also enjoying record low mortgage rates. As the recovery phase continues, demand for raw materials such as lumber will also continue to increase.
2. Renewed Demand from China
In 2011, worries about a housing bubble in China along with speculation about a slowing world economy resulted in decreased growth in demand from the region. However demand for imported softwood logs in China increased in the second half of 2012. Today, as the world’s most populated country continues to build millions of homes to accommodate large-scale urbanization, their demand for lumber from North America is on the increase.
3. Decreasing Levels of Supply from North America
According to the Forest Economic Advisors in North America, 58 mills were dismantled in the past five years due to decreased demand. This represented 19 per cent of the continent’s lumber production capacity. In addition to this, a pine beetle infestation in many forests across Alberta and British Columbia last year resulted in further supply reductions. This could reduce long term supply for decades to come.
Lumber (CME: LB) forward curves until 2014. (Source: CME – Graph created with ZEMA)
It’s clear that prices have increased amid expectations of continued growth in the US housing sector and Chinese demand. Lumber producers such as Weyerhaeuser and Plum Creek Timber have reported increased profits, suggesting that new mills will likely crop up in response to higher prices. After many major market shifts since the recession, we’re finally seeing relief for an industry that has had its fair share of difficulties over the past few years.
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