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 just dropped for a 9th straight week amid slowing DIY spending

lumber and building materials store
  • Lumber prices notch their ninth consecutive weekly loss after a brief resurgence earlier in the week.
  • The price of the key building material has slid about 60% from its peak in early May.
  • A shift in spending away from DIY home projects is impacting the market, says Bank of America.
  • See more stories on Insider’s business page.

Prices for lumber suffered another weekly loss and descended to levels not seen in roughly six months as the market contends with signs of softening demand and easing shortages.

Lumber prices on Friday fell about 4% to trade at $689 per thousand board feet. That move brought lumber below $700 for the first time since mid-January. Lumber during the holiday-shortened week had pushed higher, stoking the possibility of finding relief. But the advances proved short-lived, leading to the material notching its ninth consecutive weekly loss.

Prices have tumbled by roughly 60% since their peak of $1,670 per thousand board feet on May 7.

One potential factor in pushing lumber lower is consumers allocating funds to businesses such as those specializing in hospitality and travel as more Americans get vaccinated against COVID-19. About 48% of the population has been fully vaccinated, according to the Centers for Disease Control and Prevention.

“Our recent research … suggests a combination of high housing and wood product prices and the shift of expenditures to services in the reopening (from do-it-yourself [DIY] home projects) has negatively impacted new and repair/remodel construction expenditures,” wrote Bank of America analysts on Friday.

Meanwhile, dealers and builders are likely decelerating purchases leading up to a slowdown in construction that’s typical in summer months, they said. “This is especially true given long lead times – the concern being that today’s order of lumber shows up at the beginning of August just as prices move down at an even stronger pace.”

Signs of easing in lumber shortages have also fostered the pullback in prices. Sawmills have reportedly ramped up output after the pandemic prompted producers to stop work.

Lumber prices leapt to nearly $1,700 this year in part on a surge in demand for the building material as people stuck at home by the pandemic took up home improvement projects.

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Lumber prices just dropped for an 8th straight week – and they’re down more than 50% from highs as record-setting demand slows

Lumber
  • Lumber prices on Friday marked eight consecutive weeks of losses.
  • Prices for the key building material have slumped 56% from their peak set in early May.
  • Lumber prices have pulled back on signs of easing inventory shortages and some demand softening.
  • See more stories on Insider’s business page.

Lumber prices extended a string of losses last week, leaving prices for the key building material slashed by more than half from their peak on a mix of factors including easing shortages.

Lumber prices fell for an eighth straight week as they lost roughly 5%. The weekly decline was spared from a deeper contraction, however, as prices on Friday picked up about 1% to trade at $741 per thousand board feet.

But the weekly performance highlighted persistent weakness that’s been stalking prices since they began descending from their peak of $1,670 per thousand board feet on May 7. Wednesday marked the end of trading in June and prices closed the period with a fall of 45%, the worst monthly drop since 1978.

Prices as of Friday from the May peak have tumbled about 56%.

Lumber prices soared earlier this year, building on gains from mid-2020 as demand for the material kicked higher as people stuck at home by the COVID-19 pandemic embarked on home improvement projects. Meanwhile, demand for new homes was strong in an environment of low inventory of existing homes.

But the direction of lumber prices reversed course and moved lower, in part as sawmills have picked up the pace of output after the coronavirus crisis forced work stoppages. About 3,000 sawmills in the country have ramped up production, according to The New York Times, with a large focus on Southern yellow pine found in East Texas to the Carolinas.

Prices also softened on signs of slowing demand with homebuilders delaying projects partly to keep hold of their inventory of building materials.

Bank of America on Friday noted it’s seeing signs of inventory shortages for lumber and other home improvement categories such as appliances and cabinets beginning to ease.

“For retailers like Home Depot and Lowe’s, lumber/building materials and appliances are two of the largest categories as a percentage of sales,” wrote Elizabeth Suzuki, a research analyst at BofA, in a note published Friday.

“While improving supply is likely a positive for the retailers’ transaction counts (as in-stocks are particularly critical to professional customers who purchase frequently), it may be met with an offsetting decline in average ticket as pricing normalizes,” she wrote.

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Tumbling lumber prices are a sign that strong inflation will be temporary, Bank of England boss says

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

  • The plunge in lumber prices is a sign strong inflation should fade, the Bank of England’s governor said.
  • Andrew Bailey is among the central bankers to argue that inflationary pressures should be temporary.
  • Lumber prices soared but then tumbled 45% in June as sawmills upped production and demand slipped.
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The dramatic fall in lumber prices in the last month is a sign that strong inflation will be temporary, the governor of the Bank of England said on Thursday.

Lumber futures soared in the first few months of the year before dropping more than 40% in June. Prices peaked at more than $1,670 per thousand board feet of lumber in early May, but have since plummeted to around $760.

The drop is a sign that pandemic-driven booms in certain sectors will wear off as economies rebalance and supply catches up with demand, Bank of England Governor Andrew Bailey said in a speech on Thursday.

“We are seeing rebounds and normalisation of some commodity prices,” Bailey said. “In the US, lumber prices having risen sharply, are now retracting a sizeable part of that rise.”

“There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary.”

Read more: An ex-Goldman trader breaks down why he is ‘salivating’ to buy the dip in grain stocks – and shares 5 stocks and an ETF to play the commodity supercycle

In the UK, year-on-year inflation jumped to a two-year high of 2.1% in May. In the US, year-on-year inflation hit a 13-year high of 5% in the same month.

But both Bank of England – the UK’s central bank – and the Federal Reserve argue that sharp price rises are a result of strong growth and bottlenecks in certain sectors. They say inflation will cool as growth slows, businesses adapt and people’s eagerness to spend wanes.

In the lumber market, analysts say prices are tumbling because people are spending less on home improvements as restrictions are lifted. Meanwhile, lumber producers have increased their supply.

However, not all analysts agree that falling prices in some sectors mean inflation will be temporary.

Hugh Gimber, global market strategist at JPMorgan Asset Management, said rising wages across economies as firms rehire workers could cause prices to rise more than expected.

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Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

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 record highs is an ominous sign – and shares what investors can do ahead of the eventual crash

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Lumber prices have bottomed out, but are likely to stay double the historical average for at least the next 5 years, a lumber trader says

A lumber yard
  • Lumber has probably found a bottom at current levels, but prices will remain over double the average for the next few years, Stinson Dean told Insider.
  • The Deacon Trading founder expects lumber to trade above $1,000 for potentially the next three to five years.
  • He added that the current state of the lumber futures curve confirms that lumber prices have bottomed.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Lumber price have probably found a bottom at current levels, but will remain higher than average for the next few years, a lumber trader told Insider.

Stinson Dean, CEO and founder of Deacon Trading, expects lumber to trade above $1000 for potentially the next three to five years. The historical average is around $400, he said.

“My argument is the new normal is going to be significantly higher than the old normal while others think we’re going to go back to pre-COVID price ranges,” Dean said.

After an intense run-up in the beginning of the year, Lumber has fallen nearly 50% from May’s record high of over $1,700 per thousand board feet.

“Business has slowed dramatically. There’s ample supply. So there’s just not pressure on buyers to cover those needs…they’ve bought enough to cover whatever needs they do have,” Dean said.

He added that the current state of the lumber futures curve confirms his take that lumber prices have bottomed out. The curve can give an indication of the health of the underlying supply and demand market, he said.

Lumber futures recently began trading in contango – a situation in commodities wherein the future price is higher than the spot price. For the past year, the futures curve was inverted and in backwardation, where the future price is cheaper.

The backwardation and subsequent premium on front-month futures occurred because everyone needed lumber as soon as possible, and they were willing to pay whatever price for it, said Dean.

“People didn’t care about two months down the road, they only cared about right now because they were in the middle of a short squeeze. They had to get covered,” he added.

Now, that dynamic has changed and supply is ample. Dean explained that the futures curve in contango isn’t bearish for lumber, but it’s not necessarily bullish. It means that supply and demand are normalizing, and an equilibrium is being found.

He expects lumber prices to average around $900, but remain volatile.

Over the next five years, he sees lumber trading around $1000.

“For the rest of 2021, the phrase I would use is grind higher,” Dean added. “I think we’ll start trading around above $1000 this fall and stay there.”

Before this fall, he sees prices staying muted until homebuilders begin to expand production and deliver more homes in the next quarter. What partly caused the prices to fall from the peak was that homebuilders began to slow down and lumberyards grew hesitant to lock in future business. Now that homebuilders’ near-term needs have been covered, there’s less of a scramble for wood.

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The price of a plywood substitute that used to be cheap is hitting repeated record highs even as lumber’s rally cools

TORZHOK, TVER REGION, RUSSIA - FEBRUARY 10, 2017: Inside the Talion Arbor high-technology timber plant launched as the Torzhok branch of STOD LLC.
  • The price of a formerly cheap plywood substitute called oriented strand board has surged 97% since the start of the year.
  • The rally in OSB is due in part to the storm in Texas, which caused a shortage in a substance needed to make the board.
  • OSB has continuously hit record highs in recent weeks even as the price of lumber has cooled.
  • See more stories on Insider’s business page.

The price of a plywood substitute that used to be cheap is hitting repeated record highs, adding to the already skyrocketing cost of building a home in North America.

Oriented strand board, or OSB, traded at $1,527 per thousand board feet in June, marking a 97% increase since the start of 2021, according to Bloomberg data.

The rally in OSB is due in part to a storm in Texas earlier this year that caused a shortage in resin, a chemical substance needed to make the product.

OSB is a versatile wood panel that shares many of the characteristics of plywood but at a more affordable price. It is a combination of wood and adhesives and is structurally stable and lightweight.

The wood industry has been one of the biggest beneficiaries of the pandemic, as more people built and renovated their homes. When new home construction and home-improvement sales boomed earlier this year, inventory for lumber and OSB, among other commodities, were running low.

Experts said the surge was unexpected. The industry, for that reason, struggled to catch up.

“You don’t just start up a mill at the snap of a finger,” Drew Horter, president and CIO of Tactical Fund Advisors told Insider. “This is a supply chain problem.”

OSB’s continued rally to new heights comes at a time when lumber prices are cooling after an epic 400% rally over 12 months.

“It’s even more difficult to get OSB at the moment than it is lumber,” David Flitman, CEO at Builders FirstSource, told Bloomberg TV on Wednesday.

Read more: Bank of America says to buy these 31 small- and mid-cap stocks with average implied upside of nearly 30%, as they represent its best ideas for the 2nd half of 2021

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Lumber continues to skid below $900 with the commodity in free-fall from May highs

Saw mill.
Pieces of lumber are cut to size, to be used to assemble trusses for homes at Wasatch Truss on May 12, 2021 in Spanish Fork, Utah.

Lumber futures fell as much as 3% Wednesday to $859.8 per thousand board feet, extending the fall beneath $900 as the commodity’s rally continues to cool off.

Lumber prices surged throughout the pandemic as homebuilding boomed and supply tightened. Now, prices are trading nearly 50% below their May 10 peak of $1,711 per thousand board feet.

Over the past 12 months, however, lumber is still up over 107%.

Expanding supply is partly to blame for lumber’s recent downturn. US lumber production has jumped 5% over the past 12 months with another increase of 5% on the way, according to Domain Timber Advisors LLC, a subsidiary of Domain Capital Group, per Bloomberg.

Lumber’s soaring prices were one of the first indicators to many investors that inflation could be increasing too quickly as the economy climbed out of the pandemic. Now, lumber’s decline is signaling to some that inflation will prove to be temporary after all, as the US Federal Reserve has been insisting. Fed chief Jerome Powell reiterated this view in his press conference last week, and again at Tuesday’s congressional testimony.

“The thought is that prices like that, that have moved up really quickly because of shortages and bottlenecks and the like, they should stop going up. And at some point, they, in some cases, should actually go down. And we did see that in the case of lumber,” Powell said.

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Falling lumber prices show inflation will be temporary – and used car prices will soon follow suit, Fed’s Powell says

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

Fed chair Jerome Powell said falling lumber prices illustrate that inflation will prove to be temporary in his press conference Wednesday.

The central bank head acknowledged that inflation data has come in above expectations over the last few months, but said that the data is consistent with the view that the prices that are driving higher inflation are from categories that are being directly affected by the recovery out of the pandemic, like lumber.

“The thought is that prices like that, that have moved up really quickly because of shortages and bottlenecks and the like, they should stop going up. And at some point, they, in some cases, should actually go down. And we did see that in the case of lumber,” Powell said.

Lumber prices have fallen more than 43% since May’s record high of over $1,700 per thousand board feet, although they remain more than 139% higher over the last 12 months, making it one of the best-performing commodities in that time-frame.

Last week, lumber futures fell 18% in the biggest weekly decline for most-active futures in records going back to 1986, per Seeking Alpha.

The Fed chair said used car prices may soon follow Lumber’s trajectory. Used car prices accounted for more than a third of the total increase in core inflation from May’s reading. Powell said a “perfect storm of very strong demand and limited supply” has driven the prices up.

“It’s going up at just an amazing annual rate. But we do think that it makes sense that that would stop and that, in fact, it would reverse over time,” he added.

As for when the trend will reverse, Powell said the Fed is not sure.

“But over time it seems likely that these very specific things that are driving up inflation will be-will be temporary,” said Powell. However, he added that the bank is carefully monitoring the risk of inflationary pressures continue longer than expected.

“And if we see inflation expectations and inflation-or inflation moving up in a way that is really materially above what we-what we would see as consistent with our goals, and persistently so, we wouldn’t hesitate to use our tools to address that. That’s-price stability is half of our mandate, and we would certainly do that,” the Fed chair said.

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Lumber prices have further to slide as speculation dies down and supply catches up, a top commodity strategist says

Lumberjack lumber tree France forest
Lumber prices have fallen sharply in recent days.

  • The dramatic slide in lumber and copper prices has further to go, Saxo Bank’s chief commodity strategist said.
  • Ole Hansen said lumber supply was quickly catching up with demand, and speculators were leaving the market.
  • He also said demand for copper as an inflation hedge is falling as investors ignore price rises.
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The dramatic slide in lumber prices has further to go, as speculators pull out of the market and supply catches up with demand, Saxo Bank’s chief commodity strategist has said.

Lumber prices have fallen more than 42% since May’s record high of over $1,700 per thousand board feet, although they remain more than 150% higher for the year.

Ole Hansen, head of commodities at the Danish bank and a leading authority in the field, said a number of factors meant prices likely have further to drop.

“Something like lumber has been very much a pandemic-driven spike,” he told Insider. He said a lack of mill capacity and “people going crazy in their backyards, redoing their houses or buying a bigger house” had caused prices to soar.

Skyrocketing prices had sucked in speculators such as hedge funds, who are now pulling out of the market as prices dip, Hansen said.

“Some of that activity is bound to slow [and] supply is starting to meet the demand,” he said.

Hansen said the curve for lumber futures contracts is sloping downwards, showing that “the market is looking for quite some weakness as we head into the autumn and winter months.”

Hansen also said copper could drop another 10% from its current level over the summer, before rebounding later in the year. Copper is down roughly 10% from May’s high of around $10,750 per ton.

One reason for this is that investors think the chances of a dangerous rise in inflation have died down, he said. That means they are moving away from commodities like copper, which are seen as good stores of value at times of rising prices because they’re widely used in industry and technology.

Paul Donovan, chief economist at UBS Wealth Management, told Insider that commodities prices can be taken as a barometer of wider forces in the economy.

He said soaring home prices had cooled down some of the “frenzied” buying in the market, weighing on lumber. And he said peoples’ spending in many other areas had cooled after an initial splurge when economies first reopened.

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