It’s time to talk about lumber
Good morning and Happy Easter! It’s good to be back after a weekend off. Since we had a 4-day work week, and the holiday today, our newsletter will be a bit shorter today as most of you are spending time with family. We’re sure the week ahead will provide amble activity to report on and discuss next Sunday. That said, let’s get started.
May or maybe?
Activity in the lumber markets was extremely volatile through Q1 of this year. Whether it be the cash markets, or futures, price direction at times was difficult to gauge.
In fact, at times, historical trend tended to run countercyclical to the norm. The industry saw very little inventory build through January as positions purchased late in 2021 were liquidated in anticipation of lower prices. Of course, just the opposite occurred. There was a brief price correction lower as we moved into the first week of February, but as usual, a large portion of the industry missed this opportunity to replenish their depleted inventories. Consequently, prices rebounded and worked higher through February and into March. Along the way, the highs for the year were made. Yes, we don’t expect to see $1400 wood the remainder of 2022.
What now? Take a look at market makeup and structure and you’ll see we’re right back to where we were in late January. April has become a month of liquidating high priced inventory in search of lower prices. We now have the lower prices, but the bigger question remains, what does business look like moving forward into May and June?
Once again, we’re off cycle with the lumber markets looking for direction. April, May, and June are historically the most active building months of the year. Normally, inventories have been built for this ramp up in activity and now it’s time to sell and ship to the job sites. Instead, the bulk of the inventory purchased for this anticipated spring business is now being liquidated.
Where does this leave us for May? Given the current state of global politics and macroeconomic pressures, not to mention the US ability to shoot itself in its own economic foot, forecasts for home building and R&R activity for the remainder of 2022 are not very encouraging. Does this mean a complete and abrupt stop in the housing industry? Of course not. Especially given the backlog of unfinished houses in production and new homes under contract that need to get started. Given the current state of the economy, and lingering supply chain issues, the pace of growth in the housing industry will be more subdued.
This still leaves the month of May ahead of us. Normally a month where purchasing activity and prices slow into Memorial Day weekend. A time to lower inventory levels and manage your business expectations into the summer months. Currently, buyers are in a quandary as to what their next move will be over the near term. Inventory liquidation has happened a month sooner than expected leaving most of the industry light on their inventory positions approaching May.
How is the building season stacking up for May? Will May be an active outtake month as is usually the norm? Or have we already seen the peak of the 2022 building season? Is there a need to buy for May business or maybe not?
Fundamentals
Not much changed this past week in the lumber markets. In fact, more of the same in lower prices and continuing supply chain issues. Although the markets remain fractured, there is a feel of price consolidation beginning to form.
The drop in SYP prices has slowed with an increasing interest in buying, and perhaps building, some inventory at these price levels. Aside from the May futures contract, SYP is your least expensive option to purchase lumber right now. Our suggestion here is to buy it if you need it. At these prices, product will travel well into certain markets even with elevated trucking rates. You also need to be cognizant of the truss manufacturers that will be buying into this market to pad profit margins on forward sold jobs off of higher priced inventory. And let’s not forget the treaters, they certainly haven’t built much inventory over the past several months.
For those of you focused on the Euro import segment of the business, that market is currently price divided. The usual overproduction of 12’ and 16’ material has driven prices lower as importers scramble to unload volumes. On the flip side, 8’, 9’, and 10’ trims remain difficult to source in quantity. If you need 2x4/2x6/2x8/2x10/2x12-16’ Euro, make the firm offers and fill some inventory holes.
If you’re a user of US western species, make the firm offers, especially on carload volumes. Random lengths, studs, and even long lengths are vulnerable right now. Multiple truck offers will get you comparable value so long as you’re located in an advantageous freight lane.
Canadian SPF can be more challenging as there remain both liquidity and transportation issues. Although rail transit times are improving, mill loadings are not. Mills are more than willing to entertain firm offers, but once again it will depend on the item and where and how the load is being delivered. At this point it pays to make the additional effort in reviewing mill offerings which best suit your current inventory needs.
Although indecision and uncertainty remain across the industry in regard to upcoming business, we still view the supply side of the industry as under inventoried and in need of varying degrees of inventory replenishment. We don’t expect inventory build and out of control price hikes, but we do anticipate a short term buy cycle over the next two weeks. Will we return to $1400? No. Can the market push back to $1200? Absolutely. Be prepared and have a purchasing strategy in place. Be proactive when this opportunity presents itself, don’t be the market chaser. With ongoing transportation issues, there is no prompt wood available.
Technicals
Even though we had a holiday shortened trading week in lumber, the week was not without volatility and numerous points of interest. With 10 trading sessions remaining until spot month trading on May 2nd, we are seeing the May contract slowly moving into liquidation mode. On the flip side, we’re also seeing a build in open interest in the back months. Daily volume decreased into weekend although we did see open interest hit its high mark of 2782 on Thursday. We see increased open interest as a positive sign, even bullish at times since it provides additional liquidity to the contract and its participants.
Now, let’s take a look at the numerous points of interest throughout the trading week. For us, the most obvious was the extreme trading range witnessed on Monday. From low to high, the May contract traded in a $122.60 range over the course of the day. Something you don’t often see in lumber futures. On Tuesday, 2 items caught our attention. First were the 4 May EFP’s posted by the CME, the second, the new life of contract lows made in the January and May ‘23 contracts. Given the continued discount to cash, we expect additional May EFP’s to be reconciled and posted between now and expiration of the May contract on May 13th.
We’ve said this in past newsletters, and we’ll continue to say it today. The May contract remains your least expensive option to buy lumber. Remember, come May 2nd, the May futures contract, in essence, acts as a sawmill with a 2-week order file. Consider this when contemplating buying an open market cash position. That is, unless you’re a heavy user of SYP. We mentioned this above. But beware, we’re seeing some price consolidation in SYP.
This opportunity in May is slowly going away as the cash basis against the May contract is beginning to narrow. Whether you’re an EFP participant or not, now is the time to gauge basis convergence. This will give us, at least over the short term, an idea of price direction. Also be mindful of the narrowing in the back month spreads. Is the futures market trending back to a contango structure longer term? Or will we remain in backwardation until the current supply chain issues resolve themselves? Why does this matter? Backwardation allows us the opportunity to forward price with futures at a discount to cash. Should we move to a contango structure, we then have the ability to review basis trading opportunities. Lots of moving parts here as we prepare to move towards mid-year.
Let’s take some time to look at some technical numbers. Why? Because most managed money participants in the lumber futures contract really don’t follow the cash markets. They are technical traders and number crunchers. They look at things like levels of support, levels of resistance, moving averages, and momentum. Since Wednesday and Thursday closed as green days, let’s look at upside resistance first. The price cross at the 9 day moving average sits at $899.48. Then we move up to the Thursday daily high at $904.80. Above that, we find the 9 day and 200 day Ex. moving averages at $913…65 and $934.44 respectively. Up at $953.15, we find the Fib 50% on the high/low chart.
Now for May support. We’ll start at Thursday’s daily low at $862.10, then Wednesday’s daily low at $844.80, the Tuesday swing low at $829.30, then all the way down to the BBL of $807.50. There are more technical levels of both support and resistance on the charts. but we’ll use these as starters. The more you can understand these technicals, the more level you can make the playing field for yourself in both the cash and futures markets.
Dollars and Sense
Bureau of Labor Statistics. As reported on Tuesday, the annual inflation rate in the US continues to climb higher to 8.5% for March 2022. This is up from 7.9% in February and the highest level since December 1981. The market forecast was for 8.4%. On a monthly basis, consumer prices advanced 1.2% which was the largest monthly increase since September 2005. Coming as no surprise to anyone, the energy segment was up 32%. Also of note, food prices increased by 8.8% marking the greatest increase since May 1981. Focusing on housing, shelter was up 5% in March adding to the 4.7% increase seen in February. Nothing like taking an 8.5% pay cut. Unfortunately, the current administration believes inflation will not be under control until year end. We find that assessment rather optimistic.
Mortgage Bankers Association of America. Although mortgage applications for the week ending April 8th declined by 1.3%, we were somewhat surprised to see the purchase index increase by 1.4%. That was the good news. Unfortunately, this was the 5th consecutive weekly decline in total mortgage applications. Although the purchase index was positive, the refinance index dropped 4.9%. In addition, the average interest rate for 30-year fixed-rate mortgages moved to 5.13%, the highest level we’ve seen since November 2018. As noted by Joel Kan, MBA economist, “In a promising sign of strong purchase demand amidst affordability challenges, both conventional and government purchase applications increased.” With the expectation for higher rates, coupled with the ever-increasing rate of inflation, it would appear to us that the housing industry is faced with substantial headwinds moving into the back half of 2022.
Bureau of Labor Statistics. Another not so rosy report from Labor Statistics this past Wednesday. The Producer Price Index increased 11.2% in March over March 2021. This is the largest jump on record. This was in addition to a 1.4% increase in March over February. For context, the PPI measures prices paid by wholesalers for both goods and services. That said, it can be considered a forward -looking measure of inflation as prices are tracked through the producer/wholesaler supply chain. It’s anticipated the Fed will increase its short-term borrowing rate by .50% at their upcoming May meeting. Full year, the Fed funds rate is expected to reach 2.5%. We don’t know about you, but that 2.5% level isn’t giving us much encouragement in in the Fed fight against higher inflation numbers.
Economic Calendar. For the week ahead. Monday at 10 am, the NAHB will release their April Housing Market Index. Tuesday at 8:30 am brings us the US Commerce Department report on March Housing Starts and Permits. And last, but not least, Wednesday brings us the weekly MBA report on mortgage applications and the 30-year average rate at 7 am while the NAR March Existing Home Sales will be out at 10 am. We’re not expecting much positive news from any of these upcoming reports. But of course, one can always “hope”.
Anecdotal Thoughts
Sinclar Group FP. In addition to Canfor and West Fraser, we can now add Sinclar Group to our short list of sawmill operations curtailing production. Reasons cited by Sinclar were “increasing uncertainty around fibre supply coupled with ongoing supply chain issues.” According to Sinclar, there will be a reduction in their operating schedules at all 3 of their sawmills in BC, Apollo in Fort St. James, Lakeland in Prince George, and the Nechako sawmill located in Vanderhoof. The work week will move from 10 shifts per week to 8 shifts per week beginning April 25th. Sinclar plans to monitor this situation and make changes and/or adjustments to their operating schedules as needed. For those of you using these premium stud products, we suggest you plan accordingly for your short-term needs. Especially when it comes to 9’ trims.
Canfor. In case you missed it, Canfor has announced their Annual General Meeting for May 3rd, and their Q1 2022 Results conference call for May 4th. The General Meeting is for registered shareholders, duly appointed proxyholders, and “guests”. The May 4th Q1 2022 Analyst conference call will be held jointly with Canfor Corporation and Canfor Pulp Products to discuss their respective financial and operating results for Q1 2022. Details to participate can be found on the Canfor website. We expect positive news coming from Canfor on the wood side of the call, not so good news from the pulp side of the business. Stay tuned.
Wood Resources International LLC. An interesting article covering the sanctions against Russian exports, in particular, lumber exports volumes. These sanctions not only apply to Russian lumber exports, but also includes Belarus. Total lumber exports from Ukraine, Russia, and Belarus amounted to 34 million cubic meters in 2021. Over 25% of that production was shipping to countries that currently have sanctions against both Russia and Belarus. To make lumber exports even more difficult, FSC and PEFC have both labeled all timber from these two countries as “conflict” timber. This will impact any country buying wood from Russian and Belarus that have manufacturing facilities dependent on FSC and PEFC certifications. Several other issues will also affect the forest products industry in Russia including, foreign investment and project funding, the weak Russian ruble to purchase logging and manufacturing equipment and spare parts, and the removal of Russian banks from the SWIFT international payment transaction system. We continue to hear reports of additional volumes of European lumber remaining in Europe, as opposed to shipping into the US, to fill some of this void left by Russian, Belarus, and Ukrainian timber. We’ll continue to monitor the situation.
Once again, we would like to wish a Happy Easter holiday to you and yours, we appreciate your support. Although the markets have been “sloppy” these past couple of weeks, now is the time to have your inventory purchasing list ready. Business is being transacted every day, make sure you’re not missing your opportunity. If you are able to switch species, identify those specific items and compare pricing. As we have mentioned before, this market remains a firm offer market, sellers don’t want to see inquiry, they want orders. Be prepared and have a plan. Be proactive and control your own purchasing decisions. There are a lot of people out there in the market with a lot of different viewpoints. Sift through the “noise” and find the people you trust. Be judicious and forward thinking. We expect volatility to moderate moving closer to May. That usually indicates some form of price consolidation.
As usual, should you have questions, comments, or suggestions, we can be reached on the following social media platforms,
- bandplumber55@gmail.com
- bplumber@substack.com
- Twitter @MikeCla58829893