The eye-popping rally in the lumber price finally snapped back. Futures tumbled $250, losing over -15% from the all-time-high.
Lumber prices have been on a parabolic rally since March 2020. It has been a perfect storm of supply shortages, twinned with increased demand.
The market was already in short supply coming into the pandemic, the resulting loss of supply only served to make things worse.
Low interest rates, stimulus cheques, and home renovations during lockdown have contributed to a pick in demand. This comes just as coronavirus pandemic hampered supply.
Additionally, the robust housing market in the US has helped fuel the lumber price rally. U.S housing starts data surged to a 15 year high in March to a seasonally adjusted rate of 1.74 million.
Lumber Price Performance
First, the numbers:
May 2020 – $332
May 2021 high – $1,702
At its peak, three days ago, the Lumber price had increased by over 400% from the same time last year.
The rally in Lumber futures has seen the market curve swing into a backwardation. In simple terms this happens when the nearby price is higher than the forward price.
This tells us that buyers are prepared to pay over the odds to receive their material sooner.
This is a good indication that the market is in short supply. As long as this anomaly remains, we will likely see continued upside pressure on the Lumber price.
What happens next
For the market to return to normal, we need to see one of two things happen. Firstly, an increase in supply would alleviate the issue. However, sawmills are currently running at full capacity, with order books stacked well into summer. Therefore, the answer may lie in demand.
A decrease in demand may also help cool the rally. This also looks unlikely as the current environment remains supportive of strong demand. Of course, there is always a risk that the price runs to a level that consumers aren’t willing to pay.
At that stage, we could see demand start to taper off as focus shifts to projects that require less lumber.
For the moment, we remain interested to see how far the current correction will take us. I am not ready to discount the chances of another spike higher just yet.