Notes from the Forest - 02-24-17 Edition

Ladies and Gentlemen:

Over the past 14 – 21 days retail, pressure treaters, truss, modular home and local 2-step distribution buyers have purchased significant volumes of lumber and panels. With prices now significantly higher, and order files quickly approaching mid-March, many buyers are making a conscience effort to wait on the arrival of previously purchased stock, before re-engaging with the markets for additional inventory. Producers have extended order files to lean on and have expressed no sense of urgency to adjust prices any way but higher to gain additional sales.

The National Association of Realtors? (NAR) reported that existing-home sales stepped out to a fast start in 2017, surpassing a recent cyclical high and increasing in January to the fastest pace in almost a decade. With the exception of the Midwest region, all other major regions experienced sales gains last month. Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, expanded 3.3% to a seasonally adjusted annual rate (SAAR) of 5.69 million in January from an upwardly revised 5.51 million in Decembre 2016. January's sales pace is 3.8% higher than a year ago, (5.48 million) and is the strongest sales rate since February 2007 (5.79 million). In prepared remarks NAR, chief economist Lawrence Yun said that” January's sales gain signals resilience among consumers even in a rising interest rate environment. Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions."

Spruce & Stud Markets-:  The inquiry and sales pace in Eastern & Western SPF Std., & Btr., and No. 2 Btr., moderated further this week.    The week had a slow start, as a holiday on Monday in both Canada and the U.S. had traders out of their offices.  Buyers are still suffering from sticker shock and that definitely slowed their appetite for additional inventory – at least at these (buyers’ words not mine) ‘over inflated prices.’ It was being reported at midweek that a few Eastern producers were willingly listening to small counter offers with the hopes of keeping order files growing. Producers in the West with order files already into the weeks of 3/13 – 3/20 quoted from last Friday’s established levels. Secondaries with ownership that they wanted sold, sooner rather than later, offered interested buyers ‘canned tallies’ priced significantly below mill replacement levels. Leading some traders to conclude that the market was becoming 2-tiered. Inquiry and sales of both low grade and stud trims have also slowed, but extended order files have allowed producers to hold prices at previously established levels.

Hem \ White Fir -:  The inquiry and sales pace of Coastal and Inland White and Hem \ Fir was described by traders this week as decent, but not quite as strong as in previous weeks. Buyers are showing less interest in the markets as they digest recent volume purchases. On the other hand, producers have order files that stretch into the week of 3/6 – 3/13, and felt no urgency to sell.  It was being reported by some traders that a 2-tier market was developing. In the hopes of stirring up some sales, secondaries started to sell their ownership slightly below mill replacement values and reported limited success. Sales of low grade stock and stud trims remains strong as limited availability and order files already into the weeks 3/6 -3/13, allowed mills to either hold or move prices higher – in some instances double digits higher.

Green Doug Fir -: The inquiry and sales pace of Green Douglas Fir Std. & Btr., & No. 2 & Btr., continues to moderate, as buyers process recent purchases and continue to reconcile purchases to in hand and anticipated sales. Mill order files are a solid 2-weeks. Buyers’ focus this week were on the wider widths. Producers believe that once California is able to dry out that sales will rebound and prices will move to even higher levels. The real highlight again this week is the sale of low grade stock. Demand for No. 3 & Utility remains robust and prices inched higher again this week. Demand for No. 4 & Economy remains extraordinary, with prices up double digits again this week, and order files out into the week of 3/13 or beyond.

Cedar Lumber -: The inquiry and sales pace of Western Red Cedar (WRC) boards, fencing, dimension, radius edge decking, bevel siding, timbers and pattern stock moved back onto firmer footing this week. Buyers who were objecting to the higher prices over the past 2 weeks, have finally come to grips with the fact that product availability is tight, and that the higher prices are justified. As more buyers stepped back into the market, the pace rapidly accelerated. What was once a phone call or two, has turned into multiple calls to multiple mills, as buyers try to piecemeal what they need, and figure out later how to get it loaded onto a truck or rail car. Producers worried continuously about sourcing enough raw materials to keep up with their ever-growing order files. Canadian producers also had to deal with frustrations of the pending CVD, while wondering exactly how retroactive those duties would be applied. Buyers made it clear their preference was to purchase their inventory needs firm priced. Mills offered to sell PTS and if a buyer was unable to accept those terms, they thanked them for the inquiry and promptly sold to the next buyer in line who would accept PTS terms. Retail buyers told producers that WRC pricing was getting to the level that some of their contractor customers were asking for alternative materials.    

Shake & Shingles -: The inquiry and sales pace in the Western Red Cedar (WRC) Shake & Shingle gained additional traction as the week progressed. After holding off purchasing for the past several weeks, retail and local 2-step niche distributors realized that mills were not going to be offering lower prices, and March was starting next week. Canadian producers continue to deal with weather and available log issues that slowed manufacturing efforts. Canadian producers are also dealing with the potential CVD retroactive duties, with many choosing to price defensively, or quote PTS. Domestic producers are battling steadily rising prices for raw materials, and the quality of those logs being purchased. As a result, last week’s price increases of $ 2 - $ 3 per square held and mills were keeping upward pressure on the markets. Producers reported selling more Shingles than Shakes.    

Southern Pine Lumber -: The inquiry and sales pace of Southern Pine No. 1 & No. 2-dimensional lumber slowed another notch this week; as more buyers stepped to the sidelines to absorb recent purchases, and in some ways protest what they see as unreasonably inflated prices. With mills order files already into the week of 3/6 – 3/13 and on some selected items beyond, producers continued to nudge prices upward, particularly on wider widths. Buyers in need had few choices but to step in and purchase at the higher levels; as local 2-step distributors were often missing the exact same items that they needed.  Demand for high grade stock – D.S.S., S.S., and MSR, was actually a bit stronger than construction grade and tight supplies and extended order files kept pricing in an upward tilt. Inquiry and sales of low grade stock, and stud trims remain in sync with production and prices holding steady at previously established levels.   The inquiry and sales pace of small squares and timbers remains on solid ground and pricing was flat to modestly higher. The demand for 5/4 x 6 Radius Edge Decking continues to increase, as pressure treaters build inventory in anticipation of a strong spring season rush. As a result, prices moved modestly to moderately higher for both Standard and Premium grades.       

Pressure Treated -:   The inquiry and sales pace of pressure treated lumber, plywood and accessories remains solid. Treaters are reporting that their YTD sales are already ahead of what was a strong February 2016. The driving force behind those sales is the rapidly increasing prices that treaters are paying for brite feedstock. Treated sales may be fluctuating as weather systems come and go; but upward pricing, and few signs that lumber, and panel prices will be easing in the near term, have pro dealer buyers purchasing additional inventory attempting to be one step ahead of the rising market prices. Large box stores are playing the markets a bit more conservatively, as their seasons usually does not start in earnest until late March \ early April, even in the South. 

OSB & Veneer Panels Overview -:  The OSB and plywood markets are in the process of taking the ‘Pause to Refresh?’. After 2 – 3 solid weeks of purchasing, and prices up significantly from the start of the markets’ run, buyers are stepping back and waiting to see what direction the markets are going to go. Mill order files into the week of 3/6 – 3/13, or beyond and that clearly is supporting the markets’ pricing structure. Producers continue to believe that field inventories are lite and any increase in jobsite activity will have buyers immediately back in the market.

OSB -:  When compared to the past 2 weeks, OSB producers reported a significant slowing in both inquiry and sales this week. Buyers are  absorbing recent purchases, and sticker shock is still a factor in the buying decisions process. After 2 solid weeks of double digit price increases, this week pricing was flat to a few dollars higher. Mill order files are anywhere from the week of 3/6, to as far out as shipment in early April. Producers continue to believe that field inventories are lite for this time of year, and fully expect that when building season starts in earnest that demand could possibly exceed production capabilities.  

Southern Pine Panels -: The inquiry and sales pace of Southern Pine Rated Sheathing slowed further this week, as buyers continue to digest recent purchases. Mills continue to quote shipment for the weeks of 3/6 – 3/13. The double-digit gains of the past several weeks have given way to flat to modestly higher pricing. Retail and pressure treaters looking for prompter shipping panels turned to the secondary markets, and found that they had, in most instances, available inventory, that was priced close to mill replacement levels. Producers noted greater interest from secondary buyers towards the end of the week, and they took it as a sign that much of the volume they had on hand at the beginning of the week had been sold. Further supporting the domestic markets are a lack of imported panels from Brazil and Chile, which are still not arriving at ports along the East Coast at the pace and volume they did this time last year. The inquiry and sales pace for underlayment, sanded, siding, concrete form and other specialty panels increased modestly over the week, and prices remain in an upward tilt and producers continue to quote shipment for the week 3/6. – 3/13 depending on the specific item.

Western Fir Panels -: The inquiry and sales pace of Western Fir Rated Sheathing moderated, as buyers digested recent purchases and stormy weather early in the week, cut off a demand from California, a major consumer of Western Fir. Mills continue to quote shipment for the weeks of 3/6 – 3/13, but office wholesalers do have panels available for shipment as early as late next week. Prices remain in an upward tilt, and mills started the week raising prices modestly over last Friday’s levels and those buyers in need did not hesitate to place an order. Unseasonably warm weather in the Mid-Atlantic and Northeast and carload buyers checking on price and availability later in the week. The inquiry and sales pace of underlayment, siding, concrete form, and other specialty panels continues in lockstep with production; with prices holding at previously established levels. The availability of sanded panels remains in tight supply and this has led to modestly higher prices.

Food for Thought -: The importance of staying centered and focused. For many of the older traders (me included) the markets of the past several weeks have reminded us of the good old days. We’ve actually had several runs similar to what we have been experiencing. I can remember 1996, 1999, and 2001 was a doozy. 2004 and 2012 – 2013 all bring memories of too much demand and not enough supply. Oddly enough several of them have been triggered by the Countervailing Duty and anti-dumping issues between Canada and the U.S.; a fight that has been going on for years. The Spotted Owl and the Red Cockaded Wood Pecker also bring back vivid memories of markets gone wild in the early 1990’s. 

When these phenomenal market spikes occur it is hard not to get caught up in the euphoria, along with the energy and sense of urgency these markets create. After all, increases of $ 45 - $ 50 - $ 60 MBM over the course of a week or 2 will get your emotions and heart pumping.  History shows the nothing goes up forever, nor are downward spirals never ending. History does show, however, that extremes in either direction are usually followed by extremes in the exact opposite direction.

Anytime we have conditions such as these, I like to go back and read some of archived Notes from the Forest from the years like 1994 – 1995, or if I really want to slow myself down the more recent 2006 – 2008. The years prior to these down turns looked as if the markets could go on forever. Housing starts shattering new records – 2004 we thought building 2 million homes seemed like a real possibility. In 2008 we were wondering if the housing, lumber, panel and building materials markets would ever be able to recover.

Enjoy the ride but keep in mind it is important to stay centered and focused . . . moderation is OK.