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US\u00a0 lumber was one of 2022\u2019s worst commodity performers, and it has been volatile at the start of this year, but prices may gain on the back of a housing shortage.<\/p>\n
An overall lack of confidence in U.S. housing amid the\u00a0sharp rise in interest and mortgage rates\u00a0in the past year led to lackluster lumber demand, contributing to the \u201cprecipitous\u201d decline last year in U.S. lumber futures, says Walter Kunisch Jr., senior analyst at HTS Commodities. \u201cCompressing\u201d domestic demand and strong U.S. imports were also a \u201ccombustible cocktail\u201d for prices, he said.<\/p>\n
The Federal Reserve\u2019s commitment to combat inflation, combined with tighter underwriting standards, is \u201cscaring off many would-be home buyers and has them running for the\u2026comfort of the rental market,\u201d says Kunisch.<\/p>\n
Random-length\u00a0lumber futures\u00a0\u00a0LB00,\u00a0-0.29%\u00a0LBH23,\u00a0-0.29%\u00a0lost 67% last year. For January, prices gained 40%\u2014with the most-active contract subsequently losing over 20% in the first couple of weeks of February. They settled at $402.70 per 1,000 board feet on Feb. 14.<\/p>\n
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The volatility in the first half of February is \u201cattributed to the limited interest in trading lumber futures,\u201d says Kunisch. The\u00a0CME\u00a0\u00a0CME,\u00a0-0.40%\u00a0is delisting random-length lumber futures after the May 2023 contract expires, so \u201copen interest is falling, trading volume is low, and price volatility is rising.\u201d<\/p>\n
A new lumber futures contract\u00a0LBR00,\u00a0-1.01%\u00a0LBRK23,\u00a0-1.25%,\u00a0which launched in August 2022 and has a much smaller contract unit sizing, will replace the legacy contract. The new contract\u2019s specifications don\u2019t seem to have \u201cmitigated the market\u2019s concerns to generate increased liquidity,\u201d says Kunisch.<\/p>\n
Still, the price uptick early this year came on the heels of a January rise in the National Association of Home Builders\u2019 monthly confidence index, after\u00a012 months of straight drops in builder sentiment. That indicated that \u201cmarket participants see potential for increased demand in the next few months, which would follow typical seasonal increases in\u00a0home buying in the spring months\u00a0and could bode well for builders,\u201d says Scott Reaves, director of forecast operations at Domain Timber Advisors.<\/p>\n
The U.S. housing market may see slow lumber demand if the Fed remains committed to \u201ccontaining and combating domestic inflationary pressures,\u201d says Kunisch. The central bank, however, has signaled that it will take a more \u201ctactical and subdued approach to managing monetary policy.\u201d If buyers increase demand for new-home construction as the Fed slows or stops raising the overnight lending rate, it\u2019s plausible to see an increase in lumber demand, he says. The Fed\u00a0announced a quarter-percentage-point interest-rate hike\u00a0on Feb. 1, the smallest in a year.<\/p>\n
There are lots of \u201cvariables at play\u201d for lumber\u2019s U.S. price trajectory, says Kunisch. It will \u201clargely be determined by margins at the U.S. and Canadian mills,\u201d with margin structure impacting supplies, he says. And, to a certain degree, \u201cconsumer confidence, the health of domestic equity markets, and the path of the Fed will influence demand.\u201d<\/p>\n
Similarly, Reaves says it\u2019s too early to tell the \u201ctrue trajectory\u201d for lumber, but \u201cwe expect continued volatility\u2026based on a variety of factors, such as the builder and buyer confidence and normal supply-and-demand dynamics.\u201d<\/p>","protected":false},"excerpt":{"rendered":"
US\u00a0 lumber was one of 2022\u2019s worst commodity performers, and it has been volatile at the start of this year, but prices may gain on the back of a housing shortage. An overall lack of confidence in U.S. housing amid … Continue reading