Cash prices have dropped 21 per cent since mid-March
MONTREAL—A resurgence in U.S. housing construction is still expected to boost lumber prices, but perhaps not as high as had been expected this year.
A 21 per cent drop in the cash price since mid-March and lower future prices have prompted several analysts to trim about five per cent off their 2013 price forecasts.
Western SPF (spruce-pine-fir) softwood prices are now expected to increase 20 per cent, on top of the 16 per cent increase realized in 2012.
RBC and CIBC now expect prices will average between US$350 and US$360 per thousand board feet in 2013, which is about $20 lower than earlier forecasts, but up from US$299 in 2012.
Analyst Paul Quinn of RBC Capital Markets maintained his outlook for 2014 at US$400, but lowered his price in 2013 to US$350, from US$370.
He also reduced his forecasts for OSB (oriented strand board) and plywood.
A 10 to 15 per cent increase in North American production in most regions and weak exports is “spelling trouble in the short-term,” Quinn wrote in a report.
Analyst Mark Kennedy of CIBC World Markets lowered his 2013 forecast to US$360 and reduced his 2014 forecast price by seven per cent to US$400, from US$430.
He conceded that his outlook for lumber prices could be conservative in light of historical prices when they averaged above US$500 during several years in the 1990s and hit US$468 in 2004.
Lumber prices normally strengthen as the construction season heats up in the second quarter and weaken at the end of the year.
But prices increased by US$100 in the fourth quarter of 2012 to reach US$370 and but by May 24, about mid-way through the second quarter, they had dropped to US$320.
“While this price correction has been a ‘gut check’ time for us, we still see this pricing pullback as a correction rather than a fundamental change in lumber price trends,” he wrote in a report.
From their peak in mid-March of US$408, cash prices fell to US$320, while the futures prices dropped to US$297, from US$406.
Kennedy attributed the drop to a stronger-than-expected price increase in the first quarter, weather-related delays in building activity, increased sawmill production and lower Chinese imports.
Canada was the largest supplier of Chinese softwood lumber at 6.27 million cubic metres in 2012, followed by Russia.
Canadian shipments in the first three months of the year were up 2.3 per cent from last year.
But higher prices for North American lumber moved China to increase imports from Chile, New Zealand and Europe and reduce imports from the United States.
China is estimated to have imported about four billion board feet of lumber from North America, primarily B.C., in 2012.
Kennedy believes that could grow to six billion over the next three to four years.
As U.S. housing activity approaches and then surpasses 1.4 million starts in 2015 or 2016, the North American supply chain “is going to be challenged to keep pace,” he added.
He estimates that sawmill operating rates will climb from 83 per cent in 2013 to reach 94 per cent by 2015 as six billion board feet of idled capacity is restarted.
Two billion board feet of new capacity in the U.S. South will offset capacity closures expected in the B.C. Interior in the next three to four years.
While North American exports will increase, imports from Europe should also return despite their higher cost structures.
Quinn said the price pullback should reduce the share prices of several Canadian producers, presenting good buying opportunities for investors.
Shares of West Fraser Timber Co. are down about 17 per cent from their recent peak, while Canfor Corp. are off about 20 per cent.