Will the cold weather affect lumber prices?

The frigid weather has definitely cooled short term demand for lumber. The middle to eastern part of the US has experienced the severest winter in decades, and its impact has been felt across many sectors including manufacturing, retail and construction. Initial data shows new housing construction dropped 16% in January – See article. Forbes reports that builder confidence in February took a sharp dive with the sentiment index dropping to its lowest point since May 2013. See Article. Many lumber deliveries are being postponed as builders are unable to get out to job sites to start construction.

While some lumber traders are getting a bit nervous, the general sentiment is that lumber demand will stay strong in 2014; which is mainly why prices have stayed the same this year or even increased in some segments.

In order to get a picture of 2014, one needs to review the past year.

Below is a chart showing new housing starts by month comparing 2013 to 2012 Chart from http://www.census.gov/construction/bps/uspermits.html.

As one can see from the chart, most months in 2013 were 15 to 25 percent higher than 2012. As one can see from the chart, housing starts peaked in May, fluctuated over the summer then experienced its normal seasonal drop in November and December. Total starts in 2013 increase by 25% from 2012.

The following year by year trend chart in new housing construction shows a clearer picture of long term trends

While 2013 was still less than half of what it was in 2005, the trend has been increasing since 2009. Kiplinger is projecting continued double digit increases in new housing for 2014 – see article. In fact most of Kiplinger’s 2014 economic forecasts are showing better than average growth for most economic sectors.

Another factor for the lumber market is exports and the last half of 2013 saw significant increases in exports to Asia. While export demand is hard to forecast, many believe that China’s demand in 2014 will exceed 2013 and should continue to put pressure on lumber supply.

Last year lumber prices peaked in April but dropped sharply shortly after, bottoming out in June. Since June 2013, lumber prices generally have been increasing and are currently stable. Current lumber prices are about 4% lower than 1 year ago, but last year lumber prices skyrocketed in the spring.

Many are forecasting that while lumber demand has dropped because of weather, there is a pent up demand that will continue to increase. US and Canadian Lumber suppliers are still planning on increasing capacity in 2014. See article. If the severe weather continues well into February and March, it is possible that some softening of lumber prices will occur, but long term indicators point to lumber prices increasing in 2014. Hopefully these prices will stay below the peak last April which was on average 15% higher than current prices.