[Source: www.nbnnews.com, March 8, 2010]
Barely beginning to emerge from the most devastating housing downturn since the Great Depression, home builders in the early months of this year have been confronted by a significant run-up in lumber prices.
For the week ending on Feb. 19, the Random Lengths composite index stood at $317 per 1,000 board feet, its highest level since the first half of July 2006. That price was up more than 26% from the start of this year, when framing lumber was averaging $251.
During the first half of 2009, the index fluctuated around the $200 mark, before moving into the $250 range in late November.
(Random Lengths' composite index is a weighted average of 15 softwood lumber product prices.)
With the index registering declines in the past two weeks, NAHB Senior Economist Bernard Markstein said that home builders may have seen the worst of climbing lumber prices, at least for the short term.
Residential construction is the chief driver of demand for softwood lumber, Markstein said. With residential construction activity remaining at historically low post-World War II levels, mostly supply-side factors were responsible for the dramatic surge in lumber prices in January and February:
- Under the Softwood Lumber Agreement (SLA) between the U.S. and Canada that went into effect in the fall of 2006, Canada is subject to a complex set of export fees and quotas whenever the Random Lengths composite index price falls below $355 per 1,000 board feet. At prices below $315, the most stringent fees and quotas are imposed. Recent rulings against some Canadian provinces have added an extra 10% to their cost of exported lumber. These export fees have been exacerbated by the strengthening of the Canadian dollar against the U.S. dollar. “Although the SLA and the stronger Canadian dollar have not put new pressure on the price of lumber, they have limited the ability of the market to respond quickly to sharp price increases and temporary shortages,” Markstein said.
- With the Random Lengths cost of lumber remaining low — below $300 — for about two-and-a-half years, companies shut down many of their mills and cut back on logging operations by the second half of 2009, with significant layoffs of workers. This led to severe lumber supply constraints by the end of last year, which were probably worsened by normal mill shutdowns for the holidays in December and January.
- Unusually cold and wet weather in much of the southern U.S. and parts of Canada limited logging operations even further, helping to drive up prices.
- Demand has increased from paper and pulp mills.
- Given the cost and time involved in restarting shuttered mills, mill operators have been reluctant to ramp up production until they can be confident that higher lumber prices will prevail for an extended period and not just a few weeks. Once a decision is made to reopen a mill, it can still take several weeks to check out and service idled equipment and to rehire workers.
- Some segments of the market — notably dealers — also temporarily nudged up demand as they moved to rebuild their depleted inventories of lumber. Working inventories had thinned in response to weak demand but also because of difficulties in obtaining adequate financing for them.
“As the need to rebuild inventories abates and weather-supply constraints slacken, presumably lumber prices will decline in coming weeks,” Markstein said.
Overall, Markstein said, low levels of residential construction have been exerting downward pressure on building materials prices. This has been offset in some industries, he said, by suppliers reducing output in the face of soft demand and prices.
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