It’s time to talk about lumber
Good morning and welcome to our first issue of “It’s time to talk about lumber”. Uncertainty and indecision can make or break your business. We’re here to help. As the old saying goes, “knowledge is power’. We intend to provide that knowledge every week so you can make those informed decisions. That said….let’s get started.
Fundamentals
We view fundamentals as the process of moving the tree from the forest to the finished products. Logging, saw milling, trading, transportation, distribution, buying, selling, and manufacturing. And everything in between to the end product. All along this production chain is supply vs demand and the constant market disruptions that provide volatility.
Let’s look at an example from this past week. Over the course of the past three weeks, lumber pricing has found some buyer support. Enough to push prices higher across the various markets. More of a inventory fill-in situation than an inventory build mode. By the end of this past week, buyer interest was running out of steam. Then came the market disruptor. Late Thursday afternoon in British Columbia, West Fraser reported a fire in their log decks at their Chetwynd sawmill. As word spread, buyers became anxious. More discussions followed Friday morning on the status of the effects on the sawmill’s operations. CME lumber futures quickly traded limit bid in the Friday session.
Now what…? West Fraser continues to assess the situation. That aside, let’s look at what we do know. The semi announced production curtailments West Fraser has had in place since July are scheduled to end at the end of September. How will returning to full production capacity affect market prices? Even with the curtailments, West Fraser had difficulty selling production and it is widely believed they were forced to stack wood at several mill locations. Even with the log deck fire at Chetwynd, West Fraser noted that shipments would not be affected. Doesn’t sound like a lack of finished product?
How about the other two large western Canadian SPF producers, Canfor and Tolko? Canfor has announced a $500 base price. How does that work? With other producers in the $470 level, Canfor will sell virtually no open market cash wood. We do know that Canfor is most likely the largest contract participant among Canadian sawmills. To keep some portion of their production moving, they will resort to offering tally friendly contract cars to their preferred customer base. In addition, they will more than likely sell the historically large premium in the November futures contract to account for additional “sells”. The balance of their product will get stacked.
Although Tolko doesn’t have as large of a contract customer base as Canfor, they will sell the premium in the November futures contract. In addition their usual plan is to target the offshore markets and to run more fir through their sawmills. As a privately held company, Tolko tends not to stack wood often or for very long. At that point, they will target the cash markets to alleviate inventory build at their sawmills.
Additional Market Information
Market trends tend to follow the WSPF market. Two major reasons. First is the volume of fiber processed in Western Canada, primarily in British Columbia and Alberta. The second reason, whether you understand the ramifications or not, is the link between WSPF and the CME lumber futures contract. Hence, the focus on WSPF. In upcoming issues, we’ll examine these two statements in more detail.
Eastern Canadian sawmills had a more productive couple of weeks on the sell side due to aggressive pricing and, in most instances, shorter transit times. Whether it be Great Lakes zone or Boston rate pricing, most ESPF mills can ship both cars and trucks into major US markets. These sawmills also benefit from the major metro markets in Eastern Canada. Due to proximity, the majority of these mills ship competitively into the Toronto and Montreal markets in addition to Ottawa and Quebec City. ESPF mills were able to build solid two week order files on most items by accommodating this smaller volume, fill-in buying over the past three weeks. Inventory fill-in buying normally doesn’t add much support to a bullish price trend.
Most US Western producers were able to piggyback onto WSPF prices into larger US metro markets where species switching is becoming more of the norm. The lone exception here is GDF and its largest market…California. As those in the industry know, GDF trading normally follows its on path. Like ESPF, most US producers can ship both car and truck customers into the western US with advantageous transit times. Without inventory build in these markets, it’s difficult to find support for long term price appreciation.
Last, but not least, is the US SYP markets. This market has the greatest growth potential over the long term. We’ll save that discussion for a later issue. Last week saw better sales activity in SYP. More by default than any other reason due to its undervalued price levels relative to most other species in various markets. The expectation is for a more active pace in SYP to take advantage of this price opportunity and value.
Technical Information
From fundamental we move to technical. Lots of people like to talk technical, but most don’t fully understand how to view and interpret the data. Technical information has a lot of numbers, charts, graphs and a lot of stuff most traders don’t understand. We’ll try to keep it simple for today and examine in more detail in upcoming issues. Most technical data is centered on price movement both historically and over the near term. What do you need to know now? Just a couple things. First, prices historically set a yearly low in late October, weeks 41 and 42 on the calendar. Will the same hold true over the next 4-5 weeks? Perhaps not, but will prices be lower than current levels given the supply and demand information we have available? Review your inventory and upcoming needs before you make your decision. Second, take a look at the massive premium in the November futures contract. Upside resistance is noted at two swing highs on the charts just short of $700. Once in July, the other earlier this month. Does $700 represent value to you for December delivery? Again, what does your business model indicate for 2021 year end and Q1 2022? You can also find value by buying your cash needs now and selling the November premium to lock in the substantial basis. Once again, focus on your needs first. Moving forward, we’ll also keep an eye on that $700 price level. Should it provide resistance a third time, indications would point to mill hedging and inventory basis hedging. If we find mill selling, the expectation is that mills don’t anticipate cash prices moving to that level.
Dollars and Sense
Listen, I’m not an economist or Wall Street financier, just a lumber guy. Here are several items I saw in the news this week that caught my attention. Some points to consider as you review your inventory position for the upcoming quarter.
According to the Mortgage Bankers Association of America this past week, “The average loan size for a purchase application rose to $396,800.” I don’t know about you, but what percentage of home buyers can afford these homes? My guess is not enough.
Inflation. You can’t miss this topic in the daily financial news. At this point, I find it hardly transitory as explained by the Federal Reserve top brass. Just go fill up your gas tank or make your weekly grocery run at your neighborhood supermarket. Let’s relate this back to the construction industry and look at some producer price index numbers from August provided by the Bureau of Labor Statistics and Yield Pro. These are percentage changes pre-covid (average prices in the first three months of 2020). Lumber +24.4%, plywood products +210.8%, general millwork +11.1%, copper wire +36.3%, builders hardware +11.5%, asphalt roofing 16.5%, and gypsum 19.9%. The list goes on, but you get the picture. Housing pundits point to lack of supply driving up home prices. How about product inflation? Oh yea, transitory.
Recent home builder news. From CNBC this past week. PulteGroup lowered its Q3 and full year guidance for home closings. Reason cited? Supply chain disruptions. According to a release from Pulte CEO Ryan Marshall, “Despite the extraordinary efforts of our trade partners, the supply chain issues that have plagued the industry throughout the pandemic have increased during the second half of the year. We continue to work closely with our suppliers, but shortages for a variety of building products, combined with increased production volumes across the home building industry, are directly impacting our ability to get homes closed to our level of quality over the remainder of 2021.” Other major US home builders are citing the same issues. Some have even indicated they are proactively slowing sales in order to keep up with their backlog of demand.
Anecdotal Thoughts
The forest products industry is a large puzzle with lots of pieces. For us to get the clear picture, we must have all of these pieces in place to make informed decisions. In the following issues, we will review and discuss these “puzzle piece” topics in greater detail. These are not in any particular order, nor a complete list of upcoming topics up for discussion; Fiber availability, tariffs and duties, import and export, more housing info, lumber futures, transportation, pulp and paper and the list is almost endless.
So, it’s Sunday morning…..grab your cup of coffee, head on out to your deck, porch, or patio and have a read of issue #1 of “It’s time to talk about lumber” Comments, questions, and suggestions are always welcome. So until next Sunday, enjoy!
“Knowledge is power’ and this weekly issue of “It’s time to talk about lumber” will be powerful. I want to amplify your voice across the industry and increase your subscriber count. You should post links to your content on Pakira.com. Pakira's forum is a wholesale wood community dedicated to bringing all lumber market info into one place for industry insiders like yourself to get an idea of where the market is heading before the market moves. If you are interested, lets talk (978 500 9301 / andrew@pakira.com) or go to Pakira.com and click "sign up".