By Sam Sherrill, Deputy Editor, Crow's, RISI
PORTLAND, OR,
July 2, 2009 (RISI) -
The last few weeks have seen some sharp gains in wood products prices, from dimension lumber to panels. Among all wood products, perhaps Industrial lumber has most graphically demonstrated the snapping recoil of a market that was compressed virtually to its limit and released by sudden demand, as buyers became aware of the reality of supply shortages.
Industrial lumber includes Mldg&Btr and Shop lumber, grades destined for the moulding and millwork industries, out of which come windows and doors, finger joint mouldings and a host of other remanufactured products.
Two species form the backbone of the industrial lumber production side: Ponderosa Pine and Radiata Pine. Ponderosa Pine is the key domestic species associated with industrial lumber. Radiata Pine is entirely imported, some of it coming from New Zealand and some from Chile.
Over the course of the last three years, both Ponderosa and Radiata Pine have struggled with overproduction and the battle with low prices that overproduction brings. Since these two species compete in some of the same markets, understanding a little about how they relate is a key to understanding why they have rebounded so quickly in the last few weeks.
The years 2002 to 2006 were years of heavy overproduction in most industrial products. Both Mldg&Btr and Shop lumber prices struggled to achieve values implied by the grades of the lumber itself. The simple fact was that pine was abundant. Even though Ponderosa production was declining, Radiata imports increased.
From 2004 to 2006, according to Foreign Agricultural Service data, Radiata lumber imports from New Zealand and Chile increased from 347.6 mmbf to 481.7 mmbf, a gain of 28%. During that same period of time, single-family housing starts increased just over 6%, from 1.6 million units to 1.71 million units.
At this same time, imported mouldings were also reaching heavy levels of oversupply. From 2004 to 2006, imported mouldings increased 11%, from 1.164 billion linear meters, to 1.300 billion linear meters. This combination of oversupply in both lumber and mouldings subjected the industry to intense downward price pressure, resulting in weak prices for both lumber and finished mouldings. This weak market occurred before the U.S. housing collapse.
Thus, when other wood products were entering markets that had been eroded by construction weakness and struggling with oversupply of their own, industrial products were already depressed. Ponderosa Pine Mldg&Btr lumber, which might be expected to sell for $1150-1250 per mbf, flirted with numbers as low as $725. Radiata Pine Mldg&Btr lumber, historically valued near Ponderosa, also plunged below $800. Imported finger joint mouldings, which brought above $1500 in the early years of this decade, faded to levels near $800, C&F U.S. ports, often selling below that mark.
Despite extensive losses in both domestic and off shore suppliers, the industry was not able to achieve parity with a plunging housing market. More recently, that scenario has changed. Ponderosa Pine production will be well below a billion feet this year, according to some industry mavens. New Zealand and Chile have reduced their exports to the U.S. by over 40% and 50%, respectively, creating a situation in which the supply of lumber is very near current demand.
Thus, compression in both raw materials and finished mouldings created a Spartan supply side to fit the Spartan demand. This has been borne out by the relatively fixed levels of both Ponderosa Pine and Radiata Pine lumber and finished mouldings over all of 2008 and the months preceding this spring. The supply side was so lean that the smallest increment in demand could trigger significant price gains.
Buyers had been told that the supply side was changing, that suppliers were closing their doors, and that finding decent tallies of lumber or prompt loads of mouldings might become difficult. But with housing starts at such anemic levels, it was difficult to convince buyers of the reality of deprivation.
Prices, too, had been moribund for months, convincing buyers that change would not come until housing came back. Ponderosa Pine Mldg&Btr lumber sold for weeks in a range of $750-800, with some sand-kickers scoring even lower levels. Radiata Pine Mldg&Btr lumber languished for many weeks at $750-775, before inching its way above $800 in recent weeks.
Then spring sprung, and prices of Ponderosa lumber began to define new levels of prosperity for mills so long patient. The first week of April saw the price of 5/4 Ponderosa Pine Mldg&Btr vault $100, from $700 to $800. Succeeding weeks saw this pattern repeated to varying degrees, resulting in a level in late May of $1010, a gain of 31% in six weeks. Radiata Mldg&Btr showed its first stirrings a week ago, but this week it has moved from $825 to $900, capturing some of the distance needed to regain profitability.
Radiata Pine Shop, on the other hand, preceded Ponderosa Pine Shop in making its move, jumping from $475 in mid-April to its current mark of $640. Ponderosa has been more sedate in its move, but it has also recaptured much lost ground, rising to $600 from its low mark of $450.
Imported mouldings are less vigorous, because their markets are still dominated by the caution caused by credit questions and insecurity regarding housing. Having hit a low mark of $750 last winter, mouldings moved to $875 and are now represented by a range of $900-925 for most commodity items. The gain is substantial, but suppliers are anxious to see levels more representative of historical values.
Part of this recent move in industrial products has been the result of strong producer efforts to generate price gains, based on their knowledge that supplies are indeed short. For the short term, at least, this provides suppliers with the market leverage, and prices sweep upward. But until the demand picture deepens via an increase in housing, prices are apt to cap more quickly, as well. That alone provides incentive enough for producers to move as far and as fast as they can.
