Wood rides a roller coaster

An employee works wood in a sawmill in Montana (USA) .William Campbell / Getty Images

The trees have stopped giving large sums of money. At least for now. The price of wood in the US market has started to lose steam after reaching levels never seen before last spring. A mismatched dance between supply and demand led the raw material to a comeback that seemed to have no end. In just one year, the price of futures multiplied by more than 4.5 times. A wave of reforms and a new real estate boom in the world's leading economy fueled the hunger for this material. But on the other side, in production, sawmills - anemic since the 2008 financial crisis and hit by the pandemic - were barely keeping up with orders.

“The demand was driven by the increase in the trend to work from home; people looked for more space, made home improvements or bought new ones, ”says Ben Laidler, global markets strategist at eToro. But when the pandemic broke out, sawmills hardly saw the crisis as an opportunity, so they cut production in fear of a real estate crisis. The numbers of housing starts fell by more than 30% in April 2020, when the US became the country with the highest number of deaths attributed to covid-19 and added more than 22 million citizens to the unemployment lists. The recovery, however, came soon.

In June, housing starts were at the same levels as at the end of 2019. “The sawmills struggled to increase production quickly, but they were not able to do it,” says Dustin Jalbert, expert economist in the lumber market at Fastmarkets RISI, a consultancy. American. The problem was largely the labor shortage, as employees were slow to return to work due to the increase in infections, adds the expert. The combination of all these factors sent prices into a roller coaster ride. In August of last year, lumber futures rose 131% to $ 831 (about 702 euros, today's exchange rate) per 1,000 board feet. In the fall, timber futures contracts, which have been traded on the Chicago Mercantile Exchange since 1969,they took a slight breath and then gave way to an unprecedented scale.

In April of this year it exceeded $ 1,000 and by early May it was already at $ 1,670, 357% higher than in the same month of 2020. It is the fastest increase since the housing boom after World War II , according to Wells Fargo. And the rally has disrupted prices in Europe. "It completely swept us away," says Almudena García, president of the Spanish Association of Wood Trade and Industry (AEIM). The demand for wood not only from the US but also from Asia has encouraged the market in the Old Continent. "Prices are 100% higher than last year," he abounds. The sawmills in Sweden, the main producer on this side of the Atlantic, are working at a record pace. “The demand is important.Sawnwood inventories are at the lowest levels in 20 years and are practically empty despite high production, ”says Christian Nielsen, market analyst at Swedish Wood. "Wood imports from the EU to the US tripled in 2020 compared to 2019 to an all-time high," adds Laidler.

"The rapid and sharp rise in prices [in the US] was the culmination of years of cutbacks in lumber production," said Brian Leonard, a lumber analyst at RCM Alternatives, a commodities consultancy. But it was also the consequence of an unexpected boom in the real estate market. The total volume of existing sales in 2020 was the highest since 2006, before the Great Recession, according to the National Association of Realtors of that country. Part of that effect was driven by historically low mortgage rates that have benefited from interest rates that are at lows. The Federal Reserve has kept them between 0% and 0.25% since March last year, and it is not expected to change them until the end of 2023. This has led to strong demand,Mainly millennials (a population between the ages of 25 and 40 that numbered 72.1 million people in the US in 2019), who are entering their best years of home buying, Jalbert explains.

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Today, lumber futures are trading between $ 700 and $ 800 per 1,000 board feet.

In June alone they have lost more than 40%, their worst drop in a month since 1978. But the price is still through the roof compared to the average of $ 400 it had between 2009 and 2019. Prices have partly plummeted due to increased production at the approximately 3,000 US sawmills.

Since May of this year, customers have started complaining about high prices and have refused to pay them, says Keta Kosman, editor of Madison's Lumber Reporter, a leading Canadian publication in the market.

"By then, the balance between supply and demand was corrected a bit," he adds.

Seasonal effect

The effect is also seasonal. Typically by mid-May large home builders, contractors and retailers have already ordered and received the lumber they need for the summer. Then prices start to drop, Kosman explains. Typically, the price ranges from $ 5 to $ 10. “If the futures change $ 25 in a week it is quite worth noting. But in recent weeks they have dropped about $ 150 per week, which really is an unprecedented event, "the expert highlighted. "The price will fall further in the coming months as sawmills ramp up production, although demand is expected to remain strong," according to an analysis by Capital Economics.

The industry has already got to work. Last month, West Fraser Timber, the world's largest producer, announced that it will expand the capacity of five sawmills; for this it will invest 150 million dollars. While its competition, Canfor, will spend 160 million dollars in the construction of a new facility in Louisiana, in the south of that country. Futures, however, will remain volatile. “Demand conditions, even though they have cooled, will remain strong compared to pre-pandemic levels,” Jalbert concludes. The market frenzy is not over yet.