Lumber prices could spark a 18% rally in Weyerhaeuser as wood valuation suggests limited downside, BofA says

Worker loading lumber
  • A rally in lumber prices could spark a 18% surge in shares of Weyerhaeuser, Bank of America said in a note on Tuesday.
  • BofA upgraded Weyerhaeuser to a Buy rating, arguing that its valuation has little downside.
  • The bank believes Weyerhaeuser could issue a special dividend of $2 per share in early 2022.
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Shares of Weyerhaeuser stand to rally 18% from Tuesday’s close if lumber prices see a rebound going into year-end, Bank of America said in a note on Tuesday.

The bank upgraded shares of the timberlands owner and sawmill operator to Buy and reiterated its $41 price target, arguing that the company’s current valuation offers limited downside potential to investors.

“The embedded price in WY’s valuation is about $286/1,000 board feet, 18% below the $350/mbf we believe is fair on a normal basis,” BofA explained. On top of the valuation discount, Weyerhaeuser could issue a special dividend of $2 per share by the first quarter of 2022, the note said.

Also helping offer upside potential in shares of Weyerhaeuser is a potential late summer rally in lumber prices, BofA said, offering 3 reasons why the commodity could surge after falling more than 70% from its May peak.

Encouraging to the bank is Weyerhaeuser’s stock holding steady in recent months even as lumber futures plummeted after soaring to record highs. “WY has stopped going down on bad news… this suggests the worst of the near-term price declines is in the shares,” BofA said.

Still, there are risks associated with Weyerhaeuser stock despite its discounted valuation relative to peers, the bank said. Those risks include weak employment, a deterioration in housing fundamentals, and adverse regulations on the tax status of REITs, among others.

“While WY has its risks and tends to act more as a classical cyclical (best bought early in the cycle), we believe valuations on normalized lumber pricing are attractive given the shares’ relative 14% underperformance year-to-date,” BofA concluded.

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3 reasons why lumber prices could stage a late summer rally, according to Bank of America

lowe's remodeling
A Lowe’s employee stocks lumber inside the home improvement store in New York.

Lumber prices could be due for a late summer rally after falling more than 70% from their peak in May, Bank of America said in a note on Tuesday.

The commodity, an instrumental material in most home construction, has experienced heightened volatility this summer as supply and demand shocks sparked by the COVID-19 pandemic hit lumber yards and sawmills across the US and Canada. Lumber futures were down 7% in Tuesday trades, and are down more than 20% in July.

But Bank of America believes the continuous boom and bust cycle for lumber could once again enter the boom phase over the next few weeks.

“A better-than-expected demand outlook would prompt an inventory rebuild and could spark a large move in pricing,” BofA analyst George Staphos and team said.

These are the three reasons why lumber prices could rebound over the next few weeks, according to Bank of America.

1. “Prices should bounce off cash cost.”

The lumber futures market looks to have stabilized at prices right around the cash cost for producers, Bank of America highlighted.

“The high end of the cost curve (Canada) is ~$500-600/MBF, about where prices are currently. We would not expect pricing to drop much below this level, as it would prompt high-cost producers to reduce supply,” BofA explained.

An improved demand outlook from the housing sector could also help boost lumber prices well above the cash cost for producers.

“Our industry contacts and research suggest that spending on lumber in non-wholesale markets has perhaps bottomed, even as there are comments in the trade that we have heard suggesting that construction labor could be gradually improving,” the note said.

2. “Wildfires could keep supply firm.”

“It’s that time of the year,” BofA said, alluding the growing prevalence of wildfires in western regions of the US and Canada.

“Ongoing wildfires in the western regions of the US and Canada have raised concerns on supply constraints. A state of emergency has already been declared in British Colombia and Canfor Corp. recently said it would trim output given the impact of wildfires on transportation and supply chains,” BofA said.

“Ultimately, there is risk that wildfires could continue to impact supply, potentially helping lumber prices firm,” BofA added.

3. “Hurricane season is just on the horizon.”

The National Oceanic & Atmospheric Administration forecasted a highly active hurrican season this year, with a likely range of 13-20 named storms and 6-10 hurricanes, according to the note.

“This could put pressure on supply (and upward pressure on prices) in the US South should weather conditions impact logistics and mill operations,” BofA said. Hurricanes can also cause demand spikes in lumber as homes are boarded up in preparation for a bad hurricane, and if rebuilding efforts are needed after the storm.

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Lumber prices spike as wildfires cause producers to cut output, citing ‘significant’ supply chain challenges

Bootleg Fire burns through vegetation in Oregon, tree on fire
The Bootleg Fire burns through vegetation near Paisley, Oregon, U.S., July 20, 2021

  • Lumber futures have jumped in recent days on concerns over the impact of wildfires on supply.
  • One of North America’s largest lumber producers said it would cut output at sawmills due to the fires.
  • One lumber expert told Insider the production cut was the catalyst that confirmed to traders prices had hit a bottom.
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Lumber futures have jumped in recent days as concerns mount that wildfires in Canada and the Western US will snarl production and supply chain routes.

On Tuesday, Canfor Corporation, one of North America’s largest lumber producers, said it was curtailing approximately 115 million board feet of production capacity at its Canadian sawmills. The company cited “significant supply chain challenges” amid a “transportation backlog in Western Canada as a result of the extreme wildfire conditions.”

Lumber futures jumped 10.8% Thursday, and are trading nearly 15% higher than Tuesday’s prices. Lumber is still more than 62% below the record-high reached in May. Prices skyrocketed earlier in the year as the pandemic-fueled housing boom pushed up demand, though recently supply and demand levels have begun to even out.

“The market overcorrected, it was waiting for a catalyst,” said Michael Goodman, director of speciality products at Sherwood Lumber, referring to recent moves higher after weeks of lumber prices falling.

He added that curtailment of operations at sawmills was not the sole reason for lumber’s recent price movement, but instead the catalyst that showed people prices had hit a bottom.

Goodman now sees prices moving higher as customers start buying again, though he also expects the market to be highly volatile for some time.

While prices are rising and production cuts are creating new supply constraints, Goodman said lumber will be volatile for the next year.

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Lumber prices will fall back to pre-pandemic levels within a year amid considerable volatility, investment chief says

Worker loading lumber
  • The price of lumber futures has fallen to its lowest level since November 2020, erasing this year’s dizzying gains.
  • An investment chief says the price of the commodity could reach its pre-pandemic level in the next 12 months.
  • He added, however, that the price trends will vary by geography.
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Prices for lumber futures have descended to levels not seen since November 2020, erasing this year’s dizzying gains amid a cooling demand for the red-hot commodity.

Lumber prices fell for the 10th consecutive week to trade at $536 per thousand board feet – 67% lower from their May 7 peak of $1,670 per thousand board feet. Around a year ago, the commodity was hovering just above $400.

Despite weeks of decline, there is likely room to fall further, said Stuart Katz, CIO at wealth management firm Robert Stephens. He said the price of the commodity could reach its pre-pandemic level in the next 12 months, but whether prices remain at that level is the real question.

“This is a dynamic economy,” he said. He added that in order to predict the price of lumber, one must make a number of assumptions about the Federal Reserve’s monetary policy and the ability of home builders to pass along price increases or take margin compressions.

“You can’t lean on history when you turn off and then reopen the largest economy on the face of the earth,” Katz said. “No one has the crystal ball, so you need to look at the key fundamentals which provide push and pull pressures on, ultimately, the equilibrium of the price.”

One thing he is certain of is that the price trends will vary by geography.

“There may be regional aspects of this,” Katz said. “There’s an aggregate lumber price but because of some of the secular trends in home building and multifamily units … I could see there being local geographic tensions and price that would maybe make it more elevated than if you went to broad headline price.”

Katz said the Sunbelt states could continue to see heightened lumber prices as people move to the region from other parts of the US and drive up demand for housing.

Lumber prices at the start of the year surged, triggered by factors including concerns about an overheating housing market and millennials reaching home-buying age. But the main culprit behind its astronomical rally was the pandemic.

“I think it’s difficult to imagine a set of facts to support lumber prices going in excess of $1,600 per thousand for feet in the absence of the circumstances of the COVID crisis,” he said.

For some experts, the lumber phenomenon was a long time coming, especially given the chronic shortage of affordable homes for sale in the US.

Still, lumber wasn’t the only commodity that rallied this year despite the heightened interest. Many others from oil to copper also gained due in large part to distorted supply chains.

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Lumber prices continue to fall, and are headed to as low as $350 by August, an analyst says

Lumber prices sawmill US logs wood
Lumber prices plummeted in June.

Lumber futures are sliding after brief pop last week, falling 21% in the last five days as the hot commodity comes down from dizzying highs.

The price of lumber is trading at $642 per thousand board feet, roughly 62% lower from its May 7 peak of $1,670 per thousand board feet.

But the downtrend after scaling to unprecedented highs should be expected, said Troy Merkel, partner and senior real estate analyst at Chicago-based consulting firm RSM. He said he expects the price of the commodity to moderate, especially as supply chains normalize and recover after the last year of the pandemic.

By the end of August and into early September, he told Insider the price of lumber may settle between $350-$450 per thousand board feet due to a confluence of factors, including sawmills slowly reopening and vaccination rates rising.

And while Merkel still sees headwinds for the industry, especially when it comes to labor, he said he is optimistic the market will normalize by the end of the year.

Experts, including Merkel, have long sounded the alarm of a chronic shortage of affordable and available homes in the US.

“People took for granted the prices of lumber,” Merkel told Insider.

The spike in the price of lumber on its own has added $36,000 to the average price of a new home, according to the National Association of Home Builders.

A June 2021 report by the Rosen Consulting Group, a real estate economics consulting firm, found that more than two million housing units need to be built per year in the next decade in order to fill an underbuilding gap of at least 5.5 million housing units.

Homebuilding would need to accelerate to a pace that is well above the current trend, the study said.

But for some, like David Russell, VP of market intelligence at TradeStation Group, an online broker-dealer, the whole market “distortion” of lumber was an aberration caused by the pandemic.

“I think in some ways lumber is really just toilet paper, 2.0. It’s just a symptom of a totally weird situation that has almost never happened in history,” he told Insider. “This recession was caused by something totally external.”

Russell said prices will normalize by the end of the year, though he does not think they will return to pre-pandemic level.

“The likelihood of this happening again is very low,” he said. “This happened exactly because no one thought it was going to happen.”

A number of commodities have surged in part because of distorted supply chains during the pandemic, but lumber in particular has captured people’s attention. When asked why people have been focused on lumber over other commodities, Merkel said: “At the end of the day, people need a place to live. Housing has a personal feel, whether you’re an analyst or a prospective homebuyer.”

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Lumber prices are on pace to plunge 45% in June after a record-breaking rally driven by homebuilding demand

A lumber yard

The price of lumber futures is on pace to plunge 45% in June for one of the largest monthly drops ever, as the hot commodity comes off a record-breaking rally.

Lumber prices have been on a rapid decline since their May 7 peak of $1,670 per thousand board feet.

As of June 30, the price of lumber has slipped around 45% to $721 per thousand board feet- and is now on track to have its worst month since 1978. Exactly a year ago, lumber futures closed at $435.

“I would not be surprised at all if we see the price continue to trail lower than $600 or below toward the year-end,” Mace McCain, president and managing director at Frost Investment Advisors, told Insider. “We will continue to see supply come on board but we will not see demand continue to grow.”

McCain added that this level will be more sustainable for the wood industry and will make housing more affordable.

While it is difficult to point to one specific reason why the price of lumber futures has pulled back, some experts attribute it to the economic reopening, which has caused more people to spend less time at home.

To begin with, the price skyrocketed at the start of the pandemic when restrictions forced Americans to shelter at home, prompting many to either build new houses or renovate existing ones.

Read more: ‘If lumber crashes, stocks might be next’: An award-winning portfolio manager who’s tracked lumber prices for years breaks down why futures hitting a record high of $1,600 is an ominous sign – and shares what investors can do ahead of the eventual crash

Chip Setzer, director of trading and growth for Mickey Group, a commodity trading platform, agreed that this range is what he would consider a fair valuation as well.

He has told Insider in the past that the sweet spot would be $600-$900 as this range gives sawmill operators, truck drivers, and other players in the industry more cushion for capital upgrades and operational improvements.

Setzer did express concern that while the prices are much more reasonable now due in part to a more functional supply chain, the industry simply cannot afford another disruption.

“I have strong concerns that we will have interruptions, which will have adverse effects on supply,” he told Insider.

Setzer mentioned the recent wildfires in British Columbia, where the US gets part of its lumber supply, as well as the upcoming hurricanes in Texas and Virginia.

“If the forest is on fire we can’t get logs,” he said. “That will change the tables.”

Apart from supply chain issues, Brad McMillan, CIO at Commonwealth Financial Network, said the wild price fluctuations could also be due to market distortions, where a “real lumber shortage” turned into “something much worse.”

He said this, then, resulted in higher prices, which caused more panic buying, until some sort of limit was “reached.” At this point, which seems to be now, the price will head down, he said.

Earlier in 2021, lumber prices surged, triggered by a confluence of factors – a pandemic, concerns of an overheating housing market, and millennials reaching home-buying age. On top of this, there was already a shortage of lumber supply before the pandemic even began.

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