Mike Clark at BP Wood - 11/21

It’s time to talk about lumber

An interesting week for sure! Were you a leader or a follower? If you’re a reader of our weekly posts, then you were a leader this past week. You have a strategic purchasing strategy, you worked your plan, and you were able to sidestep the disrupters in the markets. Bravo! While others scrambled for coverage, you were able to step back and weather the actual storm.

On that note, our thoughts and prayers go out to all those Canadians affected by this deadly weather event. There is no doubt in our minds that the strength and resiliency of the Canadian people will be a bright spot moving forward as British Columbia rebuilds.

You will also notice that this week’s post is a more abbreviated edition. With so much information to review, and a holiday shortened work week ahead, our goal is to review and recap the markets leading up to this latest pricing correction. That said, next Sunday’s post will not only provide a recap, but also our thoughts as to where the markets are heading as we approach Q1 of 2022.

Leader or Follower?

Our goal at B+P is to provide you with pertinent, real world information that allows you to make more informed business decisions. Indecision and uncertainty will not grow your business. Neither will the “hope” strategy. At best, you’ll be fortunate to maintain the status quo. At worse, you’ll be on that slow decline to failure.

We have said it before and it’s worth repeating, knowledge is power! Were you a leader these past two weeks? Were you ahead of this market? Do you have a plan? Or were you with the vast majority of the market chasing ever higher prices?

Lots of questions and question marks. Those of you that have been following our posts, were leaders this past week. You gathered important market information, you filtered out the extraneous “white” noise, you looked for value and buying opportunities. Because you have a plan, these purchasing opportunities where low hanging fruit waiting to be picked. You saw the signs pointing to a market correction; outbound mill sales calls, ever growing offer sheets, shorter lead times, and finally, the firm offers. While others sat on their hands, you were buying into weakness. You were rebuilding your inventory needs for Q1 of next year. You were a market leader!

Fundamentals

Market weakness carried over into this past week. Cash pricing worked lower as mills entertained firm offers to move production build-ups and prompt loaders. European importers worked to move port inventories ahead of new vessels arriving in the next several weeks. If you needed to buy wood, now was the time. The ball was in the buyers court.

Then came the weather event in Western Canada. Torrential rains and unprecedented accumulations. Flooding, mudslides, road and rail washouts. Whole communities isolated. No way in, no way out. As the scope of this disaster unfolded through the week, the lumber markets reacted accordingly.

By Wednesday afternoon, the buying frenzy was gaining traction. Pricing was edging higher with order files extending into December. Thursday saw wide spread buyer participation across all species. Defensive pricing had little effect in slowing the demand for product. By Friday morning, most mills were off the market. Activity continued in the secondary markets albeit at significantly higher prices.

What now? The expectation is for everyone to step back on Monday to assess supply and demand. What will be the next step? The usual chasers will desperately attempt to buy inventory they needed a week ago. Most will find what they need and end up paying for their indecision and lack of a purchasing strategy. The buyers that always believe they are bigger than the market. The buyers that always drive prices higher. The buyers with no plan. On the supply side, most mills now have an order file into the week of December 13th. They will now focus on filling out that file into Christmas and sit tight until then. Expect pricing to remain elevated into year end as mills lean on order file and continued transportation issues.

Technical Info

Lumber futures started the week on a rather subdued tone. Monday was the expiration of the November contract. Volume was abysmal at 158 contracts with a gain in open interest of 64 contracts. Nothing too spectacular, except the November contract actually increased by 13 positions as the EFP crowd found buying in the mid $530’s to be a value. Buyers with a plan. As we noted in our last post, expiration could present a buy opportunity should pricing weaken into expiration. Our recommendation was to have your buying specs ready for your mill EFP partners. Needless to say, those readers that took advantage of this opportunity now own product well below current market pricing. A great value at sub $540 versus the market index price of $620 and higher late Friday. Congratulations!

The balance of the week saw pricing rocket higher. Tuesday’s session closed limit bid. Both Wednesday and Thursday finished the expanded daily limit at limit bid. Friday didn’t quite make the trifecta, settling $44.90 higher at $801.90. A gain of $134.90 from Tuesday through Friday in the January contract. The primary feature of the week, short covering. Although daily trading volume increased through the end of the week, total open interest only gained a net 13 positions. Not overly bullish considering the overall market movement for the week. Also of note were the 50 November EFP’s posted through Friday.

What now? The January basis at the close of business Friday was a whopping-$181.90! Excellent opportunities to hedge recently purchased inventory, or basis trade for a portion of your February inventory needs. Perfect opportunities to manage Q1 inventory risk. Where to fade January? There are several levels of upside resistance from $802.00 to $824.00.

Dollars and Sense

In an interview from last Monday with CNBC, Mohamed El-Erian cited a loss of credibility with the Federal Reserve over its past and current inflation narrative. El-Erian is the chief economic advisor at Allianz. He states “it is really important to reestablish a credible voice on inflation and this has massive institutional, political, and social implications.” The consumer price index reading has climbed to 6.2% year over year, its highest level since December of 1990. Needless to say, this “transitory” inflation will negatively impact the housing markets on a long term basis.

Earlier in the week, RBC Capital Markets estimated “up to approximately 8bbf of British Columbia lumber capacity (70% of BC capacity and approximately 12% of North American capacity) could be impacted by transportation disruptions” from the extreme weather event in Western Canada last week. This is estimated to be approximately 23 mmbf of lumber supply per day. Both truck and rail deliveries are expected to see slowdowns due to rerouting of additional traffic.

Robert Dietz, of the NAHB, had a timely article on builder confidence this past week in the NAHB Eye on Housing segment of their website. Builders are expressing confidence in the housing markets despite supply side challenges against increased demand. Of note, the NAHB/Wells Fargo Housing Market Index was up 3 points in November to 83. The index tracks builder sentiment. Take a look, it’s well worth the read.

From the Census Bureau on Wednesday, October housing starts were down .7% on a seasonally adjusted annual rate. On the flip side, permits were up 4% month over month on the adjusted annual basis. We will dig deeper into these numbers in more detail in our next post. The actual non-adjusted numbers are not so impressive. Say tuned.

The MBA released their weekly mortgage numbers on Wednesday. Not very positive. Mortgage applications for the week ending November 12 dropped by 2.8%. The refinancing index fell by 5.1% while applications to purchase were up 1.5%. Rate wise, the average fixed 30-year mortgage rate was up by 4 bps to 3.2%. This was up from a 5 week low at 3.16%.

Anecdotal Thoughts

Great Southern Wood Preserving announced that a subsidiary of theirs recently acquired the assets of Escue Wood Preserving of Millwood, KY. Great Southern Wood looks at this acquisition as an opportunity to strengthen their distribution coverage across their entire product line.

Canfor announced on Thursday they will be providing $125,000 to the Canadian Red Cross’ BC Flood and Extreme Weather Appeal. Appreciate the show of support!

As mentioned at the beginning of this post, we will be releasing a more expanded post next Sunday to fully recap this past week’s lumber activity. In addition, will will be providing insights into our expectations for business in Q1 2022.

We appreciate your support week to week and look forward to your comments, questions, and suggestions. Please don’t hesitate to drop us a line. We’re here every Sunday morning on Substack. Please take time to share with a friend or colleague. You can also keep up with us on Twitter through the week at @MikeCla58829893. Until next Sunday, enjoy our read and enjoy your week ahead…Happy Thanksgiving!

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