Our lumber market is notorious for over and under producing its products. The relationship between supply and demand is constantly in flux. When producers make decisions to increase supply, it is in response to a relatively long term period of increased prices where there is the perception of a supply shortage. I say perception, because supply may actually be adequate. The perception of shortage could instead be an Inventory Shift from producer to consumer. In this case, increased production only adds supply to a situation that needed no adjustment and ends up over produced. The result is increased volatility.
Conversely, decreasing production during periods of strong demand, weak prices, and inventory shift from consumer back to producer also creates excess volatility until the curtailments end. Increases in supply do not create bear markets. Likewise, production decreases do not create bull markets. Both just create wicked volatility.
Example...current OSB market...short term supply curtailments are creating excessively large speculative buyer positions and sharp counter-cyclical price increases. Once buyers realize their over bought condition, prices will weaken. To compound the matter, once mills resume production, downside pressure will be added.
That is why I am not bullish on OSB; opposite my lumber outlook.
Autumn Rally Continues
Each fall, around Halloween we get an under bought rally that propels our lumber market higher into the new year. Seasonally, one might expect prices to fall, due to shorter days and less favorable weather for building.
What makes prices firm is lack of willingness and desire on behalf of buyers to accumulate inventory. The market actually feels quiet because it is being fueled by steady just-in-time buying with no sustained periods of binge-buying. Housing’s data releases in November and December will have little impact on the direction of lumber prices.
So, while there appears to be no urgency or reason to build inventory, prices should end the year higher than the end of October.
For those reasons, I am bullish on lumber from now through early January.
The sooner December lumber needs are covered, the better.
This week #44 is the collective reversal low, meaning upside momentum should accelerate. Prices should rise until over bought...after the new year.
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.info.