The last couple of years have served up ample opportunities to be reminded of the futility of following the herd. The industry is still reeling from its hypnotic inventory accumulation at the insistence of home builders’ demands to not leave them under supplied. Some of our members took positions contrary to my May recommendation to reduce inventory, and built inventory positions that are still painful.
The lesson to be learned here is to open the blinds and look beyond the situations and conditions of your local market. Even multiple location operations can get boxed into a myopic vision of circumstances limited to their scope of interest.
The best one-liner ever offered to me was by the president of one of the largest brokerage floors in the U.S. When I asked, “What is the market going to do next?”, his reply was, “Hey, it’s bigger than me!”
In these times of instant mass communication, any information that can impact the market is known in minutes. If there was ever a time to not follow the crowd, this is it. The current expression of the herd is flight from the market.
It is clear that there is no shortage of lumber supply globally. If anything, there is an over-supply. Let me give you the only data points needed to prove the point. In Q1, we were teased with 1.7 mm housing starts and lumber disappeared. Here at the beginning of Q3, we have another 1.7 mm housing starts report and we are choking on lumber supply and prices are down $1000 with no fundamental change in housing. What was the difference? Inventory accumulation was the Q1 strategy. Q3 has no accumulation urgency. Inventory is rebalancing with mills still running at roughly 90% of capacity. Prices are attractive to speculators and investors, however fear of supply shortage does not exist, particularly with half a dozen new mills in the process of joining in the fray over the next 12 months.
Capacity to “start” homes exceeds capacity to “complete” those starts. That is bearish for lumber going forward. Next is an August-September rally that spins our heads again.
Wildfire Impact & Other Confusion
Bulls are grasping for straws. It just seems like prices ought to rally after falling $1000, right? Remember the big picture. Wildfires in Canada are no joke. Timber is being roasted and smoke inhalation is a negative influence on worker productivity. Shipments will also experience delays. Mill closures have begun. All of these factors are temporary. This disruption, however, comes at a time when mill log decks are near the highest levels of the year. Keep in mind, this is not logging season in Canada. This is log deck liquidation season when mill production peaks.
Wildfire impact will surely have a near term influence on our lumber market, scaring buyers back into fear of supply mode. It should not be lost on traders that lumber is over-supplied even for 1.7 mm starts. 2021 has been a horrible display of irrational lumber distribution.
This week our focus is first on which other Canadian mills will follow Canfor’s August stop-the-bleeding/wildfire blaming shutdowns. Then, how will the trade react to loss of August supply, compared to the inventory on hand at the producers? Will mills tuck it away and play for an August panic, or cut off order flow as soon as empty and arriving cars are sold? I expect the CN & CP will support the mills and cut back, or cut off spotting empties as mills request. That is a conversation I would like to hear.
Continuing the watch, Pac NW Dry and Green Fir mills still have prompt wood and ended the week considering triple digit price cut incentives. They and eastern Canada are at the mercy of British Columbia. SYP is improving on its own. Big box treated suppliers are in a tough spot; low inventory and amply supplied customers.
OSB is just getting started. Mills are just now reaching max storage capacity. Last week was a prelude to the next two. $200–300 price cuts to find a number that will replace the canceled contracts are in play.
For you futures watchers, traders like long September, but it is a $150 premium to the tumultuous cash side. Short November added to create a spread is also a favorite. This is going to be a stressful week.
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.