It’s time to talk about lumber
We’re quickly approaching year end. Time to recap and regroup. Why? To better understand where we are going, we need to step back and look at where we have been. I’m not talking the last 10 months; I’m talking the recent past. From the beginning of November. Everything before is history. Keep the valuable lessons, don’t dwell on the missed opportunities. Our strategy here at B+P is to always be forward thinking.
This past month has been a microcosm of the ever-changing dynamics of the lumber markets. It’s fresh in our minds. Time to recap, review the markets, search out value and opportunities, and update our strategy. Your plan needs to evolve with the markets. Time to regroup, complete 2021, and plan ahead for Q1 of 2022.
Recap and Regroup
November has witnessed many of the attributes we encounter in dynamically trading markets. All compressed into a very short time span. Now is the time to review, identify, and key into those attributes to successfully plan ahead.
The lumber markets have seen three disruptor events in November. One was anticipated, two were not. The first was the BC harvest deferral announcement regarding old growth forests. As the cash markets weakened and prices worked lower, this announcement paused the slide as we saw short term “panic” buying. The proverbial buy the rumor, sell the fact scenario. Panic until rational minds prevailed. The fact is, this announcement will most likely take several years to implement. Pricing, once again, came under downside pressure. Here was an opportunity to buy into weakness on a scale down basis. Search out value. A time to start rebuilding inventory at a cycle low.
The second disruptor was the weather event in Western Canada and the US Pacific Northwest. Flooding, coupled with road and rail washouts, paralyzed the majority the region. Although the effects on sawmill production were limited, transportation issues overwhelmed the ability of most sawmills to move outbound shipments in a timely manner. Unfortunately, this brought in genuine panic purchasing as most buyers were waiting for the markets to go to zero. Within a week, pricing in Canadian SPF had increased $100m or more. Buyers scrambled for coverage, which in turn, initiated species switching and higher prices across the lumber complex.
Those readers and subscribers that have been following our posts were the exception. After the first disruptor event, they initiated their purchasing strategy and identified value and then buying opportunities. They were working the deals. They didn’t wait, they jumped in ahead, sooner rather than later. By the time pricing started to push higher, these savvy buyers had done their buying at mostly firm offers, below published mill prices. Lumber futures opportunities, through basis trades and EFP’s, padded their purchasing strategy. Their product was purchased, at lower prices, and in the mill shipping schedule as the majority of buyers chased higher prices. Congratulations, job well done!
The third market disruptor this month was the holiday shortened week of Thanksgiving. Happens every year. Virtually zero buying opportunities and a short ship weak. For those buyers without a plan, this past week just compounded their pain. Will they learn from these errors? I doubt it, they never do. They are the perennial followers. The savvy buyers that have the plan are the leaders. Would you rather be a leader or a follower? Time to subscribe.
Fundamentals
Time to regroup. If your purchasing plan doesn’t cover your inventory needs into January, expect to pay higher prices until this current market moderates. Even though this past week was a short work week, most mills were off the market or judicious in their offerings before the week started. Mill direct prompt wood across all species is pretty much nonexistent. The lone exception may be Euro SPF that has just arrived at various ports, or close to arriving. Either way, don’t expect any deals, especially on their “A” list items.
Most sawmills, whether Canadian or US have a solid order file into the week of 12-20. Some not so popular items might be available a week sooner to ship. Be mindful of transit times. Most rail car shipments have been on schedule with some reporting minor delays. Truck transportation, you better figure 5-7 business days to get a truck booked and scheduled.
Needing product now, start dialing up your local stocking distributors and reloaders. Most have prompt wood available, albeit at higher prices. Press for some type of deal. As with every participant in the lumber distribution chain, their inventory needs turned into cash to maximize profit and turns. Maybe not a deal, or the way you would like to buy, but you really don’t have many viable options at this point. Buy little, turn your inventory and be prepared for the next buying opportunity. We’ll be closely monitoring the mills and the cash markets, searching for value in the weeks ahead. Be ready, have a plan, be decisive, become a leader. 2022 is just around the corner. Are you prepared?
Technicals
Unlike the cash markets, lumber futures activity was rather uneven on the week. The close in January after the Monday session was $772.60, the close on Friday at $766.20. A rather tight range for the week. Also of note, the daily trading range on Monday was $59.80, on Friday $15.20. The range contracted lower on Tuesday and Wednesday. A definite sign of some uncertainty and indecision in the markets. These sentiments were compounded by the big losses in the equities markets on Friday. Also of note, the January/March spread trade has been rather tame from +$4.00 on Wednesday to a low of +.20 on Friday. We expect a wider range through December.
On the plus side, total open interest gained 169 contracts through the week. With a strong cash market, the build in open interest is both encouraging and somewhat bullish. We also like the January basis for basis traders and hedgers. Should you be buying cash at these elevated levels, what better way to manage your risk. Will there be opportunities to profitably forward price January? We think so given the expectation for higher cash pricing in Q1. We’ll keep you posted moving forward.
Upside potential in January? The daily swing high on November 22 was $831.30. Do we think January can reach that level again? Absolutely. Chart review indicates the possibility of reaching the $880-885.00 range. With strong cash support, we believe that level to be attainable long term. On the downside, we like January support under $700.00. Given all the factors that underpin higher Q1 pricing, we see this price level as a buy opportunity for possible January EFP positions. Again, be ready. Know your Q1 needs and be prepared to act when the opportunities present themselves. With a full week of both cash and futures trading ahead, we should have some clearer direction of short-term market movement.
Dollars and Sense
Weekly US weekly mortgage news. According to the MBA, mortgage applications in the US were up 1.8% in the week ending November 19. This follows a drop of 2.8% the previous week. Both the purchase and refinancing indices were higher at 4.7% and .4% respectively. Also, both conventional and government load applications increased. The average fixed 30-year mortgage rate, unfortunately, was also up for the week by 4 bps at 3.24%. Borrowers continue to lock-in mortgages at current rates in anticipation of higher rates in the future.
New Home Sales. Strong demand and improved supply pushed the purchase of new single-family houses in the US higher in October for a second month in a row. This is the highest level since April. Digging deeper, the numbers were not overly impressive. Some bullet points from the Commerce Department,
- New home sales increased .4% in October vs September
- New home sales in September were adjusted lower to a revised rate of 742,000 from the earlier estimate of 800,00. Otherwise, October was a loser.
- Sales were 23.1% lower than October of 2020. Another big ouch!
- October’s data comes with a margin of error of 21.1%. Only from a government agency could you have a margin of error that high.
- The median price of a new home in October was $407,700, up from $404,700 in September. What first time buyers can afford these prices?
- Seasonally adjusted, new homes for sale in October represents a 6.3 months’ supply at the current sales rate. Looks like an ample supply.
Existing Home Sales. Several key highlights from the NAR,
- Existing home sales were up .8% in October over September. This is a SAAR of 6.34 million homes. We’re not a fan of SAAR of anything.
- The median existing home sales price was up 13.1% year over year to $353,900. Not quite in the starter range.
- Year over year, the inventory of unsold homes dropped 12% to 1.25 million homes. This is approximately 2.4 months of the monthly sales pace. Compared to New Homes, appears buyers like the lower pricing.
Check out the NAR website for a more detailed analysis.
October Housing Starts and Permits. A look into actual numbers not seasonally adjusted,
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Total actual housing starts in October month over month were down 1.72%. Single family dropped 4.83% with multi-family picking up the slack by increasing 6.41%. Year over year numbers are not much better. Total starts down .15%. Single family 11.7% lower but multi-family up 39.7%.
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Now for permits. Actual in October month over month were up 1.11%. Single family were 2.51% lower with multi-family up 7.21%. Year over year, single family permits were off 10.8% while multi-family gained 31.7%
Why we’re not enamored with SAAR numbers. They really don’t tell the entire story. We also pay particular attention to the completions rate. Higher starts and permits numbers don’t mean much if the buildings aren’t completed.
GreenFirst Q3 results. Rather skewered results given that GreenFirst completed the acquisition of the sawmill and newsprint assets from RYAM on August 28. These Q3 numbers only included 4 weeks of operating results. That said, GreenFirst will continue to operate the mills as “business as usual” moving forward while turning their attention to improving operational efficiencies and yields. This according to CEO Rick Doman. “Our goal is to build a global forest company with a focus on sustainable forestry operations.” Their unaudited interim financial statement can be found on their website.
US Department of Commerce softwood lumber duties. I’m sure most, if not all of you, have reviewed the impending duty increases on Canadian softwood lumber imports into the US. Aside from Canfor, West Fraser, Resolute, and JD Irving, “all other” Canadian producers will have a finalized total duty rate of 17.9%. The previous “all other” rate was 9%. This “all other” category represents approximately 62% of Canadian production. It is estimated that the cost of US shipments will increase by $55-60 mbf at current 2x4 #2 SPF pricing.
The expectation is for higher costs of production, especially coupled with higher stumpage rates in BC. This would effectively drive-up mill breakeven points to either side of $600m FOB-mill. There is some industry speculation that the higher rates may force Canadian mills, and the US Coalition, back to the bargaining table in an attempt to resolve the softwood lumber dispute. More of an incentive for Canadian producers since it is believed the total amount of duties on deposit currently exceeds $4 billion. For opposite sides of the argument, you can check the responses of the US Lumber Coalition and the BC Lumber Trade Council on their respective websites.
With Canfor and Resolute paying the highest duty rates, there is the expectation that both will look to reduce their shipments to the US and concentrate more on the Canadian domestic markets and global export markets. Canfor can always look to increase shipments from Vida into the US with zero duty liability. The big winner overall is West Fraser with the lowest duty rates and highest volume of production.
Anecdotal Thoughts
Some uninspiring GDP news this past week. According to the US Bureau of Economic Analysis, the US economy grew at an annualized 2.1% on quarter in Q3 2021. Better than the advanced estimate of 2%, but below forecasts of 2.2%. Personal consumption increased marginally to1.7% while private inventories added 2.13%. Nonresidential investment was a drag on GDP growth as was net exports.
According to the Washington Post, the Biden administration is proposing a reinstatement of a ban on roads in the Tongass National Forest. Dating back to the Clinton presidency, this rule bans logging and road building that would affect more than 9 million acres of the National Forest. This proposed rule would protect critical habitat and the forest’s ancient trees. The ban on logging would prevent carbon dioxide, sequestered in these trees, from escaping into the atmosphere. The rule was published November 23rd and will be subject to 60 days of public comment before finalized.
From West Fraser’s Key Achievements in 2020,
*Planted a record 73 million native seedlings. Two seedlings for every tree harvested.
*Harvested less than 1% of the 8.2 million hectares of forest the company manages.
*99% of every log is utilized by the company, 94% of their water usage is recycled, and 74% of mill operations are powered by renewable energy from biomass material recovered in their manufacturing processes.
This from Landvest. Hancock Natural Resources is selling two blocks, approximately 240,000 acres in total, of investment grade tree farms located in Texas and Louisiana. These timberlands were formerly owned by International Paper and benefit from advantageous pulpwood and sawlog supply arrangements. Industry experts anticipate Weyerhaeuser to be the logical buyer.
Acquisition news for the past week. Interfor has entered has entered into an agreement to purchase 100% of the equity interest in Eacom Timber for C$490 million. This acquisition includes; seven sawmills with a combined production capacity of 985 mmbf, an I-Joist manufacturing facility, a remanufacturing plant, and the assumption of Eacom’s duty deposits at closing equal to 55% of the total deposits. Year to date, Interfor has acquired 13 sawmills with total production capacity of 1.83 bbf and becomes the only North American lumber producer with operations in Western Canada, Eastern Canada, the US PNW, and the US South.
Federal Reserve Chair, Jerome Powell has been nominated for a second term by President Biden. Lael Brainard has been moved up to vice chair of the central bank. The administration is looking for continuity in its battle against covid economic disruptions and the taming of “transitory” inflation levels. Additional attention will be on Brainard’s leadership in modernizing the Community Reinvestment Act. This act focuses on fair housing and its impact on racial equity. Something worth keeping an eye on over the long term.
From REDFIN News, the 2022 Housing Market Predictions,
- Mortgage rates will rise to 3.6%
- New listings will hit a 10-year high
- Rents will increase by 7%
- Homebuyers will relocate to affordable cities over higher priced Sun Belt cities
- People will move to locations that align with their politics
- Condo demand will make a comeback
- Homebuyers will be more cognizant of climate risks
- Housing policies will become central to political battles about climate change
- iBuyers will become more of a niche service instead of market domination
- Department of Justice will crack down on how real estate agents are paid
Thanks to Daryl Fairweather, chief economist at Redfin, for her insights and predictions. More detail can be found at Redfin.
A rather lengthy commentary today, but we feel it appropriate as we build upon our planning for 2022. We appreciate your support, especially those subscribing and reading every week. Have questions, comments, suggestions? Don’t hesitate to drop us a line. Also, take the time to share with friends and colleagues. See what they might have to contribute. The more informed you are, the better decisions you can make. Last, but not least, don’t forget to keep up with us on Twitter through the week for up to date, real time thoughts and comments. Find us at @MikeCla58829893. We do appreciate you. Enjoy and we’ll talk next Sunday.