Inside Supply Management Magazine
November / December 2020
How Lumber Prices Hit Record Highs
The forest products industry has made headlines during the coronavirus (COVID-19) pandemic: In the spring, the pulp and paper sector was a focus during a widespread run on toilet paper, and the summer brought record-high prices for finished lumber. The week-over-week price increases for finished lumber began in May and continued into the fall.
Forest2Market’s southern yellow pine (SYP) lumber composite price for the week ending September 10 was US$928 per thousand board feet (MBF), a 61-percent increase over the previous all-time high of $576 MBF in June 2018. The North American sawmill supply chain has been impacted by pandemic-induced lockdowns that began in March. Industry capacity has been maxed, with wholesalers and distributors snatching up every board they can find.
Demand Throws a Curveball
Historically, the main driver of lumber prices has been the U.S. housing and remodeling markets, which require a well-oiled supply chain, steady import flows (primarily from Canada) and massive amounts of finished lumber, plywood, oriented strand board (OSB) and other building materials. Capacity to produce lumber is the other key pricing factor; manufacturers must be able to make and stock several products and grades to meet the demands of the huge construction market.
The record price spikes are due to three primary factors: (1) stronger-than-expected housing starts and unforeseen demand from the remodel sector, (2) capacity and supply chain adjustments and (3) market speculation driving uncertainty.
Housing starts fell 30 percent in April to a seasonally adjusted annual rate of 891,000 units before rebounding in both May and June; starts are currently at a rate of about 1.2 million units. Despite the starts volatility, demand from the remodeling sector never waned, which caught the market off guard.
An anticipated huge drop in demand was short-lived, as the remodeling sector buoyed overall demand. During the peak spring building season, Canadian lumber shipments to the U.S. were down by more than 20 percent; output from the Pacific Northwest (PNW) fell by 6 percent in the second quarter, which created an imbalance in the supply chain.
Supply Chain Still Catching Up
As production capacity has fluctuated, demand patterns have changed, and the lumber manufacturing sector has been chasing a moving target since early spring. For wholesalers and purchasers of finished lumber, who typically buy inventories weeks in advance, the result has been panic buying. Panic in commodities markets often leads to speculative buying.
This combination of events resulted in a tremendous gap in the market, and the supply chain has yet to rebalance. Five months after the lockdown peak, the finished lumber sector faces a new challenge, as production in the PNW and western Canada has been impacted by devastating wildfires that have damaged communities and timber resources.
Though order files remain full, there are signs that lumber prices may have peaked. As producers continue to react to market signals and adjust production levels, the supply/demand relationship is likely to equalize — and the North American lumber market should find its footing.
Insured wind-surge losses for residential and commercial properties in Louisiana and Texas after Hurricane Laura in August are estimated to be between US$8 billion and $12 billion, according to a data analysis by CoreLogic, an Irvine, California-based consumer-information and business-intelligence firm. Also, natural disasters often cause spikes in home-mortgage delinquencies; in the month after the storm, delinquency (at least 30 days past due, or in foreclosure) rates hit 9.5 percent in Lake Charles, Louisiana, and 9.3 percent in Beaumont, Texas, above the national rate of 7.3 percent, according to CoreLogic data. “There is never a good place for a hurricane to make landfall. But this was the best possible outcome because it spared the major population centers of Houston and New Orleans,” said Curtis McDonald, meteorologist and senior product manager at CoreLogic.
One of the poorest countries in Latin America, Suriname could be a new global oil hot spot, along with neighboring country Guyana. In September, Mike Pompeo became the first U.S. Secretary of State to visit the countries, which both have newly elected leaders and are courting business from America and China amid potential oil riches in the offshore Guyana-Suriname Basin. The U.S. Geological Survey (USGS) estimates the basin holds 14 billion barrels of oil and 32 trillion cubic feet of natural gas. The USGS planned to reappraise the basin this year, although that may be delayed because of the coronavirus (COVID-19) pandemic. Suriname, a former Dutch colony, has a population of about 575,000, with a per capita gross domestic product (GDP) of $6,881 in 2019.
During the coronavirus (COVID-19) pandemic, many organizations have found no productivity loss and continu-ing collaboration despite employees working remotely. However, six months since telecommuting began in earnest, many workers in the United Kingdom are still unsure of their employers’ expectations, according to a survey by Wrike, a San Jose, California-based project- management software provider, and SurveyMonkey. Almost half (47 percent) of respondents do not feel they have clear, formal communications around working hours, availability and productivity, and 41 percent feel they lack the proper equipment and infrastructure to effectively work from home. Also, 54 percent indicate they are unaware of the current state of their businesses — as well as their employers’ plan to withstand the pandemic’s economic toll of COVID-19.
Australia’s Energy Security Board (ESB) in September released a report outlining its vision for a redesign of the country’s energy market to serve consumer needs in 2025 and beyond. The Post 2025 Market Design Consultation Paper addresses expanding consumer choices, new technologies and large-scale capital replacement as old thermal power stations leave the market. “It is clear that the rules and market frameworks need to evolve to keep up with the accelerating pace of change,” ESB independent chair Kerry Schott said. Solar photovoltaic (PV) systems are installed on more than 2.2 million Australian homes, up from 100,000 a decade ago, and more than 10 gigawatts of grid-scale renewables have been added to the country’s National Electricity Market. Public review and response to the report ended in October; final recommendations on all reforms will be made by mid-2021.
China and the U.S. account for 38 percent of global merger-and-acquisition (M&A) transactions, according to the latest M&A Investment Index by London-based market research firm Euromonitor International. Major merger-and-acquisition deals have been delayed due to the coronavirus (COVID-19) pandemic, with such deals declining 25 percent in the first half of 2020. However, Beijing is expected to focus manufacturing capabilities on domestic consumers, especially in engineering and industrial machinery; China’s M&A activity index is expected to grow by only 5.4 percent, the lowest in the last five years. “Countries such as India, the Philippines and Vietnam are forecast to grow rapidly, at a (rate) of 26 percent, in industries including interactive media services, distribution networks and sustainable alternatives in packaged food,” comments Joao Luiz Paschoal, consulting practice manager for investor services at Euromonitor International.