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Wood Markets predicts Q2 slump

Apr. 21, 2014 - The slide in North American lumber prices is not good news for the industry. However, it was becoming quite predictable from many angles by early March, when a number of severe winter storms had paralyzed much of the country, slowing building activity as well as the flow of wood products to retailers. At the same time, most sawmills continued at near-normal production levels, while lumber inventories continued to rise.

Almost in parallel to the U.S. market, the real estate market in China started to cool as bank financing became restricted. The construction bounce in China that normally follows the Chinese New Year in the first half of February did not materialize this year. As a result, offshore log and lumber stocks soared at a time when Chinese demand was flat at best. By the end of March, lumber prices had already started to correct and log prices were just starting to move lower from their record-high levels. (A full report and further details on the outlook for China's log and lumber market is featured in this Wood Market's China Bulletin.)

From the beginning of March to the middle of April, North American lumber price declines have been quite drastic for dimension lumber, while studs have (so far) been able to weather the storm.

The question on the minds of all in the business is this: how much lower will prices go until the market finds a balance? Everyone remembers how bad the price plunge was in Q2/13, and the current situation also features a combination of supply chain imbalances: delayed housing construction coupled with growing mill stocks and a railcar shortage.

The eventual solution last year was sawmill curtailments, and it looks as if the same cure will likely be required this time. There do not appear to be any prospects of a breakout in U.S. housing (although it is always possible), nor does it look as if China can come to the rescue as it sorts through its own inventory mess. If lumber output can be curtailed quickly enough, it may, in combination with rising demand, be enough to minimize any further downside. However, with prices still high enough for most sawmills to achieve reasonable margins, it is less likely that sawmills will curtail in the short-term and more likely they will wait until lumber prices move lower, possibly invoking duties on Canadian lumber. So, here we go again!

For the full report from Wood Markets, go to www.woodmarkets.com. The newsletter features lumber, panels and wood products analysis.