By mid-July, the price for finished southern yellow pine (SYP) lumber had tumbled over 65% from a new record high achieved just nine weeks prior. Prices then bounced back slightly, but price movement has largely been muted over the last several weeks compared to the wild volatility that has been the norm for the better part of the last year.
Forest2Market’s SYP lumber price composite for the week ending August 27 was $426/MBF, a 2.5% decrease from the previous week’s price of $437/MBF. As illustrated in the chart below, price movement over the last four weeks has been minimal, suggesting there is now some stability in the supply/demand relationship, as well as a new floor price in the +/-$400/MBF range.
It’s tough to tell how long the equilibrium will last. If the lumber futures market is any guide, there is a sense of trepidation in the air as futures contracts have dropped more than 70% from their peak.
Will Lumber Prices Rally Again?
As we wrote in August, the lumber market has been so unstable over the last 18 months because there have been too many moving parts and too much noise for the market to find equilibrium. However, record high housing costs are creating a real roadblock for first-time home buyers, and the pace of growth appears to be slowing as a result.
Forest2Market SYP lumber price data over the last six weeks suggests that flat/decreasing demand from the home construction sector and expanded mill inventories have created a market that is better attuned to current needs than it has been in recent months. This should limit substantial price reactions in either direction and provide some much-needed stability. But for how long?
Bloomberg recently wrote that historical stock price movement may portend more volatility in the near term. “Over the past 20 years, lumber prices and shares of companies from West Fraser Timber Co. and Canfor Corp. to Louisiana-Pacific Corp. have tended to slump in September before rallying into the new year, according to a Bloomberg analysis of seasonality patterns. RBC Capital Markets analyst Paul Quinn says don’t expect this go-around to be any different.”
“’We see a positive setup for the traditional seasonal trade, where shares will typically bottom around mid-to-late October before rallying in anticipation of the upcoming building season,’ Quinn wrote in a note to clients. Demand for wood products is likely to rise once the homeowners return from their summer holidays and slow their spending on leisure activities, he added, citing lumber traders.”
Looking at Forest2Market SYP lumber price data from 2020 in the chart above, we see confirmation of this trend as prices crashed in September and October before reversing course in 4Q and skyrocketing into 2Q2021. However, 2020 was an anomaly in virtually every way imaginable. While individual company stock prices may follow a similar annual pattern between 3Q and 4Q (as Quinn suggests above), SYP lumber prices typically do not. A closer look at the percentage change in average quarterly price over the last five years illustrates that this pattern developed only one time in 2017.
It’s important to note that the global economy was largely coming out of government-induced lockdowns during 4Q2020, so economic growth had nowhere to go but up. A year later, however, some countries remain in various degrees of lockdown and impacts from the pandemic are far from over. The primary lumber market reaction to COVID over the last year (a surprising increase in demand in combination with a decrease in production) created wild volatility that drove record high prices. With COVID cases now surging once again and warnings about new variants of the virus, ongoing supply chain bottlenecks, transportation constraints, etc., will the lumber market experience something similar again in 4Q2020 and into 2021?