As I See It
January 13, 2010 — By Jeff Meyer
As we move into 2010, we’re experiencing an extremely unusual lumber market. Although underlying demand for hardwood lumber has not improved measurably, lumber availability is tighter than at any time in the last couple years. In short, this is almost wholly supply driven. Whether due to weather (particularly in the south), lack of financial capacity, or simply sawmill shutdowns, mills are producing much less green lumber than two years ago. This translates into a shortage of lumber at a time when demand is still quite weak. If there is any increase in demand, prices could shoot up relatively quickly. Then again, our industry is famous for adjusting to changes in demand. We’ll have to wait and see what happens.
We continue to see encouraging economic statistics relating to the housing markets. Over the last several months, housing starts have increased consistently, although they are still less than half of what they were a few years ago. One of the major national builders, Lennar, just announced last week that it was profitable in the 4th quarter, the first quarter in some time that this has been the case. The overall US economy grew 2.5-3% in the 3rd quarter, and is expected to grow even faster (close to 4%) in the 4th quarter. All these positive statistics are tempered, however, by the fact that unemployment remains persistently high (above 10%). Until people truly feel confident about their job status, it’s unlikely that housing markets will improve significantly.
One other thing to keep an eye on is how long the Fed continues to buy up mortgages. Currently, the Fed buys somewhere between 2/3 and 3/4 of all mortgages produced, which keeps mortgage interest rates low. The Fed is scheduled to end buying these mortgages in March, which many think will drive mortgage interest rates up by at least a full percentage point. We’ll have to see how the Fed navigates this.
With regard to specific markets, greater China is the strongest market in the world. An increasing share of the lumber shipped to China is staying in the domestic market rather than being re-exported to the U.S. or Europe, which is a good thing for our business. This allows us to tap into the growing Chinese domestic economy. In addition, the white oak business into Europe (and also lower grades of white oak into Asia) has improved steadily over the last couple months. Again, this is primarily supply driven. In the U.S. domestic market, I hope I’m wrong but I don’t believe we’ll see any significant changes in demand until the spring at the earliest. Right now, things seem to be a little better in the eastern half of the U.S. than the western half.
So although on balance things seem a little better, we’re still in for a challenging 2010.