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Thursday, November 4, 2010

Lumber Market Update

As with any market there are many cyclical tendencies that a buyer looks for: seasonality, products over- or under- valued, supply issues, over- or under-production. As the housing market has changed over the last several years, so have trends in commodities. The seasonal patterns that were once important are not as relevant.

This is also true when it comes to the lumber market. A few years ago when housing starts were robust, the market had a bullish look to it. There never seemed to be enough lumber and the prices reflected that. As the housing sectors have seen the dramatic slowdown, prices have also reflected that the last several years. The lack of building has damped any type of lumber market runs like the ones seen in ’04 – ’05 where violent swings were the norm.

A new player has come to the North American lumber mills – China! In the last several months as China has been swallowing up large amounts of lumber, this added volatility to the lumber market that has not been seen in quite some time. Lumber yards across the US are waiting, trying to fathom when and where the next big purchase will take place. Canadian and American lumber manufacturers welcomed these purchases because of the positive ripple effect. Prices this year have increased anywhere from 30% to 50%.

Going forward this means adjusting to the “new normal” in the lumber industry. China does not seem to have any rhyme or reason to their buying patterns. When they need the material, they buy it and buy a lot! It has been enough to get future and cash markets moving higher. This causes a scramble for all the lumber yards across the country because of low inventories in the US. In turn this benefits all lumber mills, even those that don’t sell to China. Thus, the “new normal” of commodity markets going forward. Please keep this in mind for the remainder of ’10 and going forward to ’11.  Just because activity is slow in your area, doesn’t mean it is slow globally.

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