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Lumber prices increased over 37% in 2012, mainly due to the continued growth in the housing industry. If the US housing market continues to rebound, the consensus seems to be that lumber prices in 2013 and 2014 will continue to increase and perhaps reach historical highs. Canadian lumber mills have been running at full capacity the last few weeks which is historically a down time for lumber production. Some of this demand may be due to speculations caused by Hurricane Sandy. As stated in a previous blog post, this may be temporary and demand may drop once the actual situation becomes apparent. But the long term driver for wood prices is the US housing market.
The expectation is the US housing market will continue to grow as inventory of existing homes is low and demand appears to be strong. The graph below gives a long term synopsis of the housing market
The housing starts in November 2012 were 861,000, which was slightly down from October. The trend over the last 50 years suggests that at some point housing starts could peak at around 2.2 million! No one is suggesting that we will reach that peak or even come close in the next couple of years, but the historical trend does show the potential for housing starts.
During the steep drop that started around 2007, many saw mills were shut down. This is one of the reasons that while our current demand is nowhere near the 2006 level, there is a supply issue. Saw mills are expensive to start up, but one wonders whether prices will get high enough to entice some businesses to start up their lumber plants again. The natural economic laws of supply and demand would suggest that at some point in the next 2 years, supply will increase. But until it does, we could continue to see tight supply and high lumber prices.