February27

Lumber Market Update – March 2019

By Paul Rogers

Seemingly all at once, mill curtailments, rail interruptions and mild weather upended the market in early February, and the resulting upset created a rally that further exacerbated the situation. The lumber market, which had been lackluster for months, suddenly had a reason to go all-in on buying and the ensuing rally caught many by surprise. The action started upon the announcements from major mills out west (Canfor, Conifex, Tolko and West Fraser) that they were curtailing production as a result of log supply constraints, log costs and poor sales (although suspicions are that it was mostly the latter). Once industry news reports put the word out that “volumes of lumber were to be pulled out of production”, fears arose of being shut out. Factor in the effect that the Polar Vortex had on interrupting truck and rail transportation in central states and, conversely, the exceedingly mild weather had on the East Coast that kept construction workers building instead of plowing, there was enough to be concerned about covering inventories and so buying commenced. However, this latest rally left much to be desired in terms of sustainability, as buyers carried a cautious tone towards their purchases, despite the best efforts of traders who were proclaiming that the sky was falling: it was still February and future demand was hard to determine. Still smarting from last year’s deflating prices stemming from an epic run-up, buyers didn’t blindly commit to material that they either assumed they would need or were advertised as “bargain” prices. Demand, like weather conditions in New England, can be fleeting and this was clearly a supply driven rally: the market tempered and prices followed suit. Unlike demand and weather conditions, supplies can linger and that is the current stage that we are in now: how much was bought and how much demand is to be seen in the coming months is not a clear read. As of print, prices have come off but are firm. With March, (the official advent of “building season”) upon us, we anticipate that the market will remain firm for the duration of the month with the potential for a bump up as the month progresses.

Supply and demand in the lumber market isn’t what it used to be: it wasn’t too long ago that this classic microeconomic model was driven by a simpler system of lumber production and housing starts, and the struggle between the two to find an equilibrium. Today, our advanced technology world has given suppliers the tools to better manipulate the market, by being able to create a demand that may not have existed if it weren’t for their ability to expertly and efficiently curb or accelerate their production. This latest rally is a great example of that as by determining through algorithms of production, log supply and sales trends, mills can decide to simply shut down and tighten supply until they can get the prices they want. Today, the most successful mills have computerized machinery that advanced the speed of production, optimizers that bring forth a higher yield from lumber that continues to be in steady decline in volume and quality, and sales penetration in to territories beyond their own continent. All of these factors (and more) enables today’s modern mills to have greater control over their future. We can likely anticipate more of these “supply side” markets in the future, as mills have gone from a flashlight to a laser beam in terms of managing their supply. Efficiency of this sort will not likely be realized any time too soon on our side, the “demand” end of the equation (as it is currently too vague and vast to pinpoint), but perhaps with the advances of technology (such as engineered wood and panel-building), we just may be closer than we realize. 

Despite what the market is doing, we do our best to stabilize pricing by averaging costs and keeping in close contact with our customers as to their current and upcoming needs. In most cases, it gives us the distinct advantage of being able to lock in pricing for 30 days and clip out market peaks. Benjamin Franklin coined the phrase “an ounce of prevention is worth a pound of cure”, but we also like to think that an ounce of planning is worth a pound of reaction. Thank you for your business! 

Paul Rogers, Purchasing Manager

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