Notes from the Forest 11-19-21 Edition

Ladies and Gentlemen:?

The lumber and panel markets took on a slightly firmer tone as the week progressed. Buyers returned to the markets not because they wanted to, but because they had to out of need. Reports of local distribution missing several key items continued to circulate. The January CME Lumber Contract being up 4 days this week and gaining $134.70. also provided buyers with confidence to resume limited volume purchasing. Ongoing transportation issues that have led to shipment delays, were further exasperated by flooding rains in the Pacific Northwest and British Columbia. Those storms have resulted in mud and rockslides, highway and rail bridges and tracks being washed out. That in turn, has further slowed or completely halted truck and rail traffic in those areas. Mills continue to discount excess inventory, but tried to hold the line on items where supply and demand were close to being in balance. Mill production schedules have moved into the week of 12/6, but prompt shipments were often available if a buyer made it a ‘must have’. ?

On Wednesday, the U.S. Census Bureau reported that privately‐owned housing starts in October were at a seasonally adjusted annual rate (SAAR) of 1,520,000. This is -0.7% below the revised September rate of 1,530,000 but is 0.4% above the October 2020 rate of 1,514,000. Single-family housing starts in October were at a rate of 1,039,000, this is -3.9% below the revised September figure. The October rate for units in buildings with five units or more was 470,000. Building Permits are the forward-looking portion of the report and in October privately-owned housing units authorized by building permits were at a SAAR of 1,650,000. This is 4.0% above the revised September rate of 1,586,000 and is 3.4% above the October 2020 rate of 1,595,000. Single-family authorizations in October were at a rate of 1,069,000; this is 2.7% above the revised September figure of 1,041,000. Authorizations of units in buildings with five units or more were at a rate of 528,000. On Tuesday, The National Association of Home Builders (NAHB) /Wells Fargo Housing Market Index (HMI) reported that builder sentiment in the market for newly built single-family homes edged 3-points higher in November to a reading of 83. Marking the third consecutive upward movement in the HMI. Builder confidence topped at a level of 90 in November 2020. Any reading above 50 indicates that more builders view conditions as good rather than poor and that demand remains strong. ?

Spruce & Stud Markets -: The inquiry and sales pace of Western and Eastern Canadian SPF Std., & Btr., and No. 2 & Btr., experienced an uptick in activity during the week. Heavy rains and massive flooding in B.C., which has led to mandatory evacuations of several towns, as well the closure of numerous major highways and railroad routes served as the catalyst to get buyers back into both markets to cover mid-December or beyond anticipated needs. As a result, mills have been able to sell at or above last Friday’s levels and prices have continued to trade at or above those levels from there; for shipment available the week of 12/6+/-. Some of the price increases also reflect the anticipated increase in the Antidumping and Countervailing duty on Canadian lumber shipping into the U.S., which is scheduled to go into effect next week. B.C. producers attempt to move additional finished product over the border prior to the increases have been stymied by the rains and flooding. Eastern mills were able to move some inventory over the border during the week. The sales of low-grade also improved. Mills started the week quoting low-grade at or above last Friday’s levels and prices traded at or higher from there; for production available for shipment the week of 12/6+/-. Stud trim sales also have experienced a round of renewed buyer interest. Mills started the week quoting stud trims at or on either side of last Friday’s levels and prices traded in a similar pattern from there; for production available for shipment the week of 12/6+/-.??

CME Lumber Futures –: The CME Lumber Futures Contract for November expired at 12:00 Noon CST on Monday, November 15th 2021. For the past 2-days of trading (11/12 and 11/15) CME Futures were down 2-days. CME Futures have lost -$14.00 and ended the contract trading below last Friday’s Cash Market of $555 by $ 19.00, CME at $ 536.00. The CME Lumber Future Contract for January is now the forward month, and will expire on Friday, January 14th at 12:00 Noon CST. For the past 4 days (11/15 – 11/18), CME Futures were up 4 consecutive days. CME Lumber futures have gained $134.70 and are trading above the midweek Cash Market of $570 by $187.00 CME at $757.00. One Year Ago, today (11-18-20) CME Futures closed at $595.70.?

Hem\ White Fir -: The inquiry and sales pace of Coastal and Inland Std. & Btr. No.2 & Btr., White and Hem-Fir, remains on the quiet side. Weakening prices, particularly in the narrow widths, had buyers nervous. However, CME Lumber Futures up the past 4-days in a row, limited prompt shipping mill inventory, extended mill production schedules and ongoing transportation issues, made it difficult for buyers to remain out of the markets. Mills started the week quoting at or below last Friday’s levels and prices traded at or on either side of those levels from there; for production available for shipment the week of 12/6+/-. Low-grade sales are starting to show signs of fatigue. Mills started the week quoting low-grade at or below last Friday’s levels and prices traded in a similar pattern from there; for production available for shipment the week of 11/29+/-. Stud trim sales, remain lackluster, but were better this week than last. ?Mills started the week quoting stud trims flat to lower and prices traded close to those levels from there; for production available for shipment the week of 11/29+/-. ??

Green Doug Fir -: The inquiry and sales pace of Green Douglas Fir (GDF) Std. & Btr., & No. 2 & Btr., remains subdued. With prices in the process of correcting lower, buyers limited their purchases to must have fill ins, with many first looking at alternative, in stock inventory (higher grade \ longer length) before venturing into the marketplace. Speculative Q1 purchasing was minimal. Mills started the week quoting below last Friday’s levels, with the narrow widths more susceptible to discounts. Prices edged lower from there; for production available for shipment the week of 11/29+/-. The sales of longer lengths (22’ +) continue to accelerate and with it their pricing. The sales pace of low-grade has also succumbed to the market malaise. Mills started the week quoting low-grade at or below last Friday’s levels and prices traded at or moved lower from there; for production available for shipment the week of 11/29+/-. Stud trim sales lost additional energy over the course of the week. Mills started the week quoting stud trims at or below last Friday’s levels and prices traded in a similar pattern from there; for production available for shipment the week of 11/29+/-.?

Cedar Lumber -: ??The inquiry and sales pace of Western Red Cedar (WRC) boards, fencing, dimension, radius edge decking, siding, pattern stock and timbers experienced modest follow through from last week’s uptick in buyer interest. Buyers limited their searches to near-terms needs, with a handful of buyers looking to cover anticipated January and February needs. Buyers continue to seek greater clarity on the recently announced deferral of old growth logging in parts of B.C. As well as, anxiously awaiting the confirmed increase of the Antidumping and Countervailing Duty on Canadian lumber being exported into the U.S. As for the increase in duty, most mills have already indicated that they intend to immediately pass that on to their U.S. based customers. Producers started the week quoting boards, fencing, dimension, radius edge decking, siding, pattern stock and timbers at last Friday’s levels and prices traded close to those levels from there. Transportation issues continue to delay this shipment of finished product. ?

Shake & Shingles -: The inquiry and sales pace of Western Red Cedar (WRC) Shake, and Shingles remains active. Buyers continue to try to understand the full repercussions of the recently announced deferral of old-growth logging in B.C. on the WRC market. Mills started the week quoting above last Friday’s levels. However, this week, most producers were either selling Price Time of Shipment or completely off market. This as mills try to deal with the deferral announcement, as well as the current and potentially greater lack of raw materials. While still contending with ongoing late shipments, and well extended production schedules. Transportation issues continue to add another layer of complexity to the market’s problems.

Southern Pine Lumber -: ?The inquiry and sales pace of Southern Pine No.1 & No.2-dimensional lumber remains subpar. With many traders declaring that the traditional holiday season slowdown was underway, buyers became even more cautious and conservative in their purchases. Producers started the week with additional unsold inventory on the ground and quoting at or below last Friday’s levels and prices traded or on either side of those levels from there; for production available for shipment the week of 12/6+/-. Demand for high-grade remains steady but lower prices on construction grade products has high-grade buyers in a more conservative mindset. High-grade prices started the week being quoted flat to higher; for production available for shipment the week of 12/13+/-. Demand for low-grade remains steady to strong, with narrow widths particularly difficult to source. Mills started the week quoting low-grade at or above last Friday’s levels and prices traded at or moved higher from there; for production available for shipment the week of 12/6+/-. Stud trim sales continue to hold steady. Producers started the week quoting stud trims above last Friday’s levels and prices traded at or edged higher from there; for production available for shipment the week of 12/6+/-. Demand for small squares and timbers continue to seasonally slow. Mills started the week quoting 4x4 – 4x6 – 6x6 at or on either side of last Friday’s levels and prices traded in a similar pattern from there; for production available for shipment the week of 11/29+/-. Limited production of 5/4 x 6 Standard and Premium Radius Edge Decking has helped to keep demand ahead of supply. Mills started the week quoting R.E.D. at or above last Friday’s levels and prices hovered close to those levels from there; for production available for shipment the week of 12/6+/-.?

Pressure Treated -: ?The inquiry and sales pace of pressure treated lumber, panels and specialty items continues to hold steady. A change in the weather pattern, and the holidays quickly approaching, has slowed demand from the DIY sector. However, pro dealers continue to report that apart from ?a handful of weather delays, overall, jobsites remain active and demand for treated products continues to exceed traditional seasonal levels. Buyers continue to keep their on-ground facility inventories lite, as the ongoing price correction in brite feedstock has raised their concerns about downside risk. Pro buyers also expect that eventually the weather and holidays will slow demand, as they typically do every year. Treaters who service offshore accounts are reporting that their Q3 sales were double-digits higher year-over-year, with the Bahamas, the Caribbean and Mexico all major participants. ?

OSB & Veneer Panels Overview –:?Sales activity in the OSB and plywood panel markets was inconsistent throughout the week. Every day there were spurts of activity, which were typically followed by extended periods of quiet. Mills made outbound calls to their carload volume customers trying to entice them into purchasing a highly mixed car or two. There were a handful of carload buyers in the Midwest and Northeast who felt comfortable enough with the shipment time and the negotiated prices to take them up on the offer. However, for truckload buyers the continuing softness in the Western Fir and selected regions of OSB and very limited signs of firming trend in Southern Pine were all valid reasons to remain cautious. With many buyers continuing to lean on local 2-step distributors for units out of warehouse. With the Thanksgiving holiday interrupting production next week, panel mills have been able to extend their production schedules into the week of 12/6+/-. Transportation issues remain a problem for traders.?

OSB -: The inquiry and sales pace of OSB continues to trade in the pattern that was established several weeks ago. Buyers seeing little fluctuation in the marketplace continue to limit their purchases to near term needs, with many opting for units out of 2-step distribution to limit their exposure to the potential of changing market conditions. Buyers with contract obligations continue to report that those contracts are providing them with more than ample support for their current sales volume. Producers again started the week quoting at or modestly below (Southwest) last Friday’s levels and prices held close to those levels from there; for production available for shipment the week of 11/29+/-. Mills continued to make outbound calls to carload volume buyers in the hopes of getting a firm counteroffer and a sale. Unfortunately, those calls, at best, had limited success.?

Southern Pine Panels -: The inquiry and sales pace of Southern Pine Rated Sheathing started the week with unexpected energy. Active jobsites and limited supplies at both the mills and secondary levels, had buyers back in the marketplace looking for additional inventory to carry them through most of December. Mills still dealing with excess inventory started the week quoting modestly below last Friday’s levels but once that inventory was eliminated, firmed and then gently lifted prices higher. Mills with limited to no excess inventory started the week trying to move production schedules as far into December as possible, while modestly raising prices along the way. Either way mills ended the week quoting production available for shipment the week of 12/13+/- , but the double-digit counteroffers, for now, are a thing of the past. Sales of Mill Cert. remain on the slow side. Mills started the week quoting Mill Cert. at or below last Friday’s levels and prices traded in a similar pattern from there; for production available for the week of 11/29+/-. The inquiry and sales pace of underlayment, siding, concrete form and other specialty panels remains on the quiet side. The exception remains sanded panels where supply continues to trail demand. Mills started the week quoting specialty panels at or on either side of last Friday’s levels and prices traded at close to those levels from there; for production available for shipment the week of 12/6+/-. ?

Western Fir Panels -: The inquiry and sales pace of Western Fir Rated Sheathing continues to lack consistency. Every day this week there was an hour or two of activity followed by a prolonged period of silence. Producers made outbound calls to their carload volume buyers in the Northeast and Midwest and that did, after some intense dickering on prices, lead to the sale of a few highly mixed carloads. West Coast truckload buyers leaned on 2-step distribution for fill ins, or if they had sufficient replenishment needs, a highly mixed truckload from a mill or office wholesaler. Mills started the week quoting modestly below last Friday’s levels and prices traded at or below those levels, via counteroffers, from there; for production available for shipment the week of 12/6+/-. Activity in the CC, CC Plugged & Touch Sanded, Struct I, and Mill Cert. markets continue to sputter. Mills started the week quoting these items below last Friday’s levels and prices traded at or below those levels from there; for production available for shipment the week of 11/29 +/-. The inquiry and sales pace of value-added panels, underlayment, sanded, siding, concrete form and other specialty panels remains on the quiet side. Producers started the week quoting at or a few dollars below last Friday’s levels and prices hovered close to those levels from there; for production available the week of 11/29+/-.

Food for Thought-: In my career I have worked for several publicly traded companies. Every quarter, employees were encouraged, or required to listen to the company’s quarterly conference call and earnings report, Representing the company on the call would be the investment relationship manager, the CEO and the CFO. Also, on the conference call were investment advisors from several of the largest investment companies and major banks. The meeting always started with a company discussion of current sales and earnings and went onto identified tailwinds and more importantly the headwinds and what impact they might have on earning in the next quarter or beyond. It was then opened to questions by the investment community. ?

In times of headwinds, the CEO and CFO always spoke about and emphasized the various levers they had at their command and that they could pull to change the course of the issue(s) that were causing sales and profits to suffer. Usually, the first level they would discuss would be a reduction in force (AKA RIF). It always seemed to resonate well with the financial folks on the call and with the shareholders. Other levers could be slowing or stopping a particular service or carrying a particular product that was not selling at established margins. Another lever was to get contractors to take over some of the duties currently being performed by company employees. And the list goes on and on. However, lowering prices never seemed to be a favorable nor acceptable option. ?

In the current lumber and panel market slowdown, the only lever that producers appear to have to pull is that of lowering prices. Something that they have been doing for the past several weeks and with little positive effects on the markets. I am certainly not suggesting nor championing the idea of taking away people’s source of income. The lumber and panel markets are supposed to be supply and demand focused. It appears, once again, that current production levels are exceeding buyer\ builder’s needs. This leads one to ask why are mills continuing production at the current rate??It is a proven fact that when supply is tight, just like at the start of this year through mid-May, that prices went from lower to flat to accelerating wildly. ?

Unless mills are using the current price declines as some sort of tax offset; the only conclusion that can be reached is that current pricing is still significantly well above break-even levels. However, for retailers and stocking distributors the negative impact of declining prices on the value of their on-ground inventory or recent purchases that are in transit are cause for real concern for their profitability and leaves them with no levers to pull.?