Watch Lumber: An Indicator for the Economy and an Investment

February 23rd, 2013
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Housing Starts, Construction Upticks, and Lumber Hikes

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Construction’s apparent recovery has upped the demand for structural commodities: above all lumber.   Year over year, lumber prices jumped 13 percent!

Some analysts worry the construction industry may waiver to mounting lumber expenditures. However, the current housing market still offers affordability, which is imperative to keeping consumer demand strong enough to charge profit.  As long as the trend persists, the construction industry will generate net gains and the national economy will grow.

Follow up:

According to Random lengths, U.S. lumber production increased 7.9 percent from 2011 going through November. Meanwhile, Canadian lumber production through November increased 5 percent from the previous year.

The chart below depicts annual net increases in commonly traded wood species:

Click to enlarge above image

Lumber is a cyclical commodity which often sees price hikes in early spring.  As the case with ski resorts, usage rates depend on weather.

According to professional forester, Steve Nix, mills attempt to sell inventory in spring to alleviate potential wood spoilage that can occur in summer’s heat. Leading into winter, prices typically increase as mills build reserves in preparation for poor harvesting conditions.

If spring comes early, mills relinquish inventory, lowering prices dramatically.  If winter stagnates, prices continue upward.

Near the end of January, Layman’s Lumber Guide explained a modest decrease in prices to be relevant to mills loosening of inventory. That was before the Northeastern winter storm, which Redmans explains to be one factor behind February’s price jumps.

Perhaps the trend is beginning to present itself again in lumber futures this week.  Since the early February uptick, lumber futures (LBS H3) have retreated 20 points from over 400 earlier this week to just above 380 as of 9 AM this morning (22 February 2013).  By market close the price had declined further to 376, a decline of 6% in just a few days.

In any event, summer comes and lumber prices fall.  A commentary posted yesterday (21 February 2013) offered the opinion that lumber prices had gotten ahead of themselves, which would reinforce the seasonal factor, if true.

Housing demand necessitates construction, which in turn necessitates lumber; new housing demand has summoned construction and lumber to emerge from dormancy.

The National Association of Realtors have concluded that during the fourth quarter of 2012, national home prices grew by their greatest rate in seven years.  Of the 152 metropolitan areas included in the study, 133 saw an increase in median home prices.

The fourth quarter's national median price for an existing single-family home was $178,900: up ten percent from the same period 2011.

Lawrence Yun, NAR's chief economist noted:

Home sales are on a sustained uptrend…Home sales are being fueled by a pent-up demand and job creation, along with still favorable affordability conditions and rents rising at faster rates. Our population has been growing faster than overall housing stock, so supply and demand dynamics are very much at play

The NAR’s finding show a 21.6 percent decrease in existing homes for sale: currently 1.82 million.  Part of that figure includes distressed home sales, which are currently down 30 percent from the same period a year earlier.  The deeply discounted foreclosures and short-sales accounted for 23 percent of fourth quarter sales.

Important to both the construction and logging industries alike, is the NAR's national annual Housing Affordability Index figure: 193.5 in 2012.  A score of 100 predicts a median income household has enough income to qualify for a median price home with a 20 percent down payment and applying 25 percent of annual income to mortgage payments.  Currently, the index shows the median income family accumulates nearly double the capital necessary to buy a home.

Yun continued by saying:

Even with rising home prices, conditions are expected to stay very favorable with the index averaging 161 in 2013, which would be the third best on record.

Chairman of the National Association of Home Builders, Barry Rutenberh articulated the following:

With inventories of new homes at razor thin levels, builders are moving prudently to break ground on new construction ahead of the spring buying season to meet increasing demand

Based on findings from the U.S. Census bureau, December 2012 saw 954,000 housing starts, a 12 percent increase from the previous month (partially explained by Hurricane Sandy).  An additional 800,000 permits were issued (30 percent increase from the previous year).  Overall, new home construction increased 28 percent from 2011.

Now back to lumber...

In lieu of the recession, numerous lumber mills closed; to meet demand for production mills are beginning to reopen.

On February 12, Brad Thorlakson president and CEO of Tolko Industries LTD, announced Athabasca mill in Slave Lake, Alberta will reopen in the first quarter of 2014, after five years of closure.

Thorlakson emulated some optimism of economic recovery in the following statement:

Before we could commit to the significant financial and human resource investment required to restart the mill, we had to determine, to the greatest degree possible, that current improvements in market conditions are sustainable. We are confident about the future of the industry and look forward to positive years ahead.

Once operational the mill will employ 150 people directly, which is good news for Slave Lake.  It’s a trend emulated across both the logging and construction industry.

Construction labor has withered by 28 percent since the onset of the recession. The lack of labor has necessitated higher wages to common and skilled craftsmen alike.

In general, construction wages top that of many other occupations: $38.16 per hour, an increase of $3.10 since last year.  The Building Cost Index (BCI) rose by 2.1 percent (partially due to the 2.3 percent gain in skilled labor).

If both construction and lumber continue to show upward trends, we may begin seeing further economic growth, as construction wages trickle down.  Additional construction requires new investments in a wide array of industry professionals including: architects, real estate agents, appliance producers, and commerce.

As for lumber, layman’s outlook ahead is naturally positive:

For at least the remainder of 2013, we will likely see a housing boom caused by lack of availability and lack of ability to produce.  That is a panic scenario that should keep the lumber market booming

Below is a list of lumber products/ companies associated with the lumber industry:

Click to see larger image.

Keep an eye on these prices, both for possible profitable trades as well as potential economic indicators.


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