North American lumber prices are set to surge in the next couple of years amid a tightened supply from Canada as the U.S. housing market continues to strengthen after years of weakness, a new CIBC report predicts.
Spot prices for Western softwood lumber made from spruce, pine and fir trees have steadily increased this year, rising 24 per cent since January to $310 US per thousand board feet in August. That's 40 per cent higher than two years ago, when the U.S. house-building industry was still suffering from years of overheated construction activity and a collapse in the mortgage lending industry.
"We believe the underpinnings remain in place for a significantly improved U.S. housing market and a very strong North American lumber market in the 2014/2015 timeframe," analyst Mark Kennedy said.
Higher prices are expected to be supported by significant curtailments in North American production capacity, reduced supply due to mountain pine beetle in British Columbia, increased sales to China and pent-up demand in the U.S.
The futures market is suggesting lumber prices will soften over the next two months before strengthening early next year as the fundamentals of the U.S. market improve despite some recent mixed signals. U.S. home building slipped in July after improving in June, but new permits rose to their highest level in four years.
Housing starts in the U.S. decreased 1.1 per cent from June to a seasonally adjusted annual rate of 746,000. However, new construction was up 21.5 per cent from a year ago and permits were 29.5 per cent higher. The increases came as inventories of unsold new homes in the U.S. hit a 50-year low, home prices appear to have bottomed, and housing affordability is near a record high due to low interest rates.
Kennedy estimated that U.S. housing starts will reach 900,000 next year and just over one million in 2014.
At that level, lumber prices should reach about $340 per thousand board feet by the first quarter of 2013. The price should average above $400 if starts reach 1.4 million units per year in 2014.
That's good news for lumber producers in Canada that export to the U.S. and workers who have faced years of challenges. "As sawmill operating rates hit 80 per cent, we expect lumber prices to move meaningfully and sustainably higher, which should prompt a period of significant and improving profitability for the producers."
Among the companies expected to benefit are Canfor, West Fraser Timber, International Forest Products, Conifex Timber and Western Forest Products.
