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Seasonal Decline In Lumber Prices May Not Occur

|Includes:CFPZF, West Fraser Timber Co. Ltd. (WFTBF)

In my lumber market outlook in early July I indicated that given the big price decline in lumber this past spring and the associated limited buying, there should be a significant price increase from the low in mid-June to a high in August or the first part of September as the pace of buying picks up. Specifically, I indicated that the price of SPF 2x4s could possibly reach a high of $360 per MBF, but that there could then be a sell off to a seasonal low, which normally occurs in October.

In fact a rally has occurred this summer with the price of SPF 2x4s rising from $287 per MBF in mid-June to a current price of $342 as of mid-September. However, whereas I was previously anticipating a sell off following this rally, I am no longer looking for a seasonal decline in price.

This change in price outlook is primarily driven by a continued high level of exports of lumber from the U.S. and Canada to China, and the expectation that these exports will stay at a high level. When lumber demand for exports is combined with demand from U.S. housing starts, the exports can significantly offset the normal seasonal decline in demand and usage of lumber from just housing starts.

This more bullish outlook for the price of lumber may be strengthened even further because of declining production. The latest U.S. and Canadian production data for the month of June shows a significant decline from the recent peak in April, and this lower level of production may have continued for the summer months.

Furthermore, throughout the period of the summer rally, both mills and lumber buyers have remained cautious in their selling and buying. Mills have tended to focus more on maintaining solid order files rather than on raising prices, and at the same time buyers have not built large inventories. The effect of this behavior, which I expect to continue, is to keep prices from being vulnerable to a period of decline.

I now believe the price of SPF 2x4s could rise to $400 per MBF or higher by the early part of 2014 without a normal seasonal decline in prices occurring. In part this increase in price should be supported by the normal tendency for Canadian production to be at a seasonal low in December.

I believe that being long lumber futures is the best way to take advantage of this price outlook. Owning large lumber producers like West Fraser (WFT.TO) and Canfor (CFP.TO) would make sense except for the fact that the stock prices are already reflecting the expectation of higher lumber prices and are trading near all-time record highs. I am long lumber futures.