This time last year, my message was that 2017 was going to be a year of extreme volatility. To start the year, 2x4 #2 SYP-E was trading for $460. The same product in Canadian SPF-W was $310. SYP was $150 over SPF. By November that relationship had flipped with SYP at $430 and SPF at $490. SYP was then trading at $60 under SPF. That was a $210 volatility swing. And now, as we close in on year-end. SYP is back on top again by $40...a 5-week $100 boomerang in the opposite direction. Just those two items have had a $310 change in their relationship to each other this year.
There were lots of reasons for the huge volatility. The top two were the settling of the duty dispute between the U.S. and Canada and the production uncertainties due to Canadian acquisitions of dozens of SYP lumber mills.
So, where does that leave us for 2018? For the first time since production attrition after the Great Recession a decade ago, softwood lumber and OSB are equipped for production increases. New and reopened facilities are on track to greet spring 2018.
With lumber prices trading for a while at or near all time highs, housing demand on the rise and housing supply at critical shortage levels, producers have incentive to boost production.
Canada only need resume its 2016 levels to increase production by 6%. SYP will continue to ramp up as Canadian producers convert all of their sawmill purchases to high production operations. Green Doug Fir has ample capacity after having lost its northeast connection. Western U.S. KD lumber could be the surprise. Loss of timber due to fires and strong local demand appear bullish, however rising SPF offerings at competitive prices will sufficiently supply the demand.
Looks to me like 2018 will have less extreme volatility. Instead of higher highs and higher lows, a bull market, I expect lower highs and lower lows, a bear market.
Bear markets are difficult to trade. Inventory value declines, creating the false impression that you must be cheap to get an order. The challenge is to avoid purchasing just prior to major drops and be ready to buy just after them. A good example is Canadian SPF right now. Last week I advised to prepare for a year-end buy and prices dropped nicely. That sets up a nice fill-in buy this week.
This is not an easy business. The target is always moving, changing speed and direction. I will help you hit close to the bulls eye.
Looking Forward ...ml
A veteran lumberman, Matt Layman publishes Layman's Lumber Guide, the weekly forecasts and buying advisories that help component manufacturers save money on lumber purchases every day. You can reach Matt at 336-516-6684 or matt@laymansguide.org.