Lumber Market Trends
Date August 2019
- A 20% tariff was imposed on imported Canadian lumber in November 2017
- U.S. President Trump met with Canadian Prime Minister Trudeau in June 2019; however, there has been no resolution to the softwood lumber dispute and the resulting tariff
- Although the 2018 framing lumber market was volatile, pricing in 2019 has been relatively stable
- Privately-owned housing starts for July 2019 were down 4.0% over June 2019 and down 3.6% on a cumulative basis through July 1, as compared to 2018
approximate net recovery on cost
Housing starts mixed: Domestic housing starts are noteworthy when monitoring the health of the construction industry and the demand for dimensional lumber. For July 2019, new, privately owned housing starts in the United States were at a seasonally adjusted annual rate of 1,191,000 units. This represents a 0.6 percent increase over the July 2018 rate of 1,184,000 units, indicating a slight rebound. However, when viewed on a cumulative year-to-date basis, total privately owned starts were down 3.6 percent through the period ended July 1, 2019. Monthly rates through July have been a mix of positive and negative trends year-over-year.
July starts were also mixed by region. Year-over-year, total housing starts, which include single- and multi-family units, increased in the Midwest (1.7 percent) and West (13.7 percent) regions for July. For the same period, housing starts in the Northeast and South regions decreased 8.7 percent and 4.0 percent, respectively. Home size and use of alternative building materials such as steel studs could skew the demand implied by the U.S. Census Bureau and the Department of Housing and Urban Development official housing start numbers, but the levels are still seen as favorable.
Lumber pricing has stabilized: Largely as the result of the tariffs imposed by the U.S. Commerce Department in November 2017, and related trade negotiations among the U.S., Canada, and Mexico stalling, prices for softwood lumber imports skyrocketed in the summer of 2017 (after Hurricane Harvey) and continued into early 2018. Eighteen months later, the composite price index for framing lumber has been relatively stable through August 2019. The index began the year at $329 and reached a year-to-date high of $377 in mid-February. As of August 2, 2019, the index was at $346, indicating stability for the time being. Experts advised that, following the volatility of lumber pricing in 2018, prices are expected to be high through 2020.
Lenders should keep in mind that, while industry publications can indicate regional market trends, published prices are not necessarily representative of transactional activity. Prices generally represent full truckload quantities with Free on Board mill freight terms. Long-term supplier relationships, volume discounts, and freight logistics can impact the actual gross recoveries in the event of an orderly liquidation.
Purchasing patterns: The 2018 market volatility impacted buyers’ purchasing patterns, with just-in-time purchasing to meet immediate needs becoming more common, and participants allowing inventories to run down to avoid large stocking positions. In 2019, although the market has settled, concerns about the economy and uncertainty related to tariffs, interest rates, and consumer confidence keep buyers following a just-in-time pattern. It is important to note that if the subject inventory is too lean, the marketability could be impaired in a liquidation.
Conversely, it may be more difficult to liquidate larger inventories to a customer base adverse to advance purchasing. As of August 2019 some traders reported a modestly stronger tone to the market, but sales volumes were not heavy. Trading was described as “a persistent grind.”
Geography may limit marketability: Lumber distribution is generally regional because of freight logistics and cost. Given robust mill activity in the Southeast, a wood products inventory located in the Pacific Northwest would not necessarily be an attractive buy for a potential customer in Georgia. Therefore, the liquidation footprint would likely remain within the traditional geographical area of a mill or of a wholesaler’s existing customer base. Additionally, regional building practices, builder preferences, and/or codes may limit the marketability of some materials. Assuming dimensional lumber is milled in Canada for export to the United States, tariffs and currency exchange fluctuations can also impact gross recoveries.
Green lumber may have lower recoveries: Special consideration should be given to “green” and undressed kiln-dried lumber. Cut-to-length and/or tree-length logs are optimized to yield the longest length possible of specific dimensions (e.g., 2x4, 2x6, 2x8, etc.) The cut lumber exits the sawing operations green and will require drying to reduce moisture content. Once dried, the lumber is usually dressed and graded. Sold “as is, where is,” the market for green lumber is generally limited to other operations with kiln and dressing capabilities. Undressed kiln-dried lumber would also have limited marketability and would likely be sold to buyers with dressing capabilities.
If the subject inventory is located in a region with several local mills, the demand for green and/or undressed lumber would be greater than a remote mill. Also, if regional mill activity is declining, the local demand for green and/or undressed kiln-dried lumber may be depressed. Again, freight logistics and cost will impact the price potential buyers are willing to pay for this inventory.