Lumber prices drop, but forestry still a strong bet: analysts

A rusty supply chain will contribute to uneven growth and continuing volatility in the sector, but industry watchers are confident that prices will rebound
Ernst Young's Kevin Eck: U.S. economists overly optimistic

It was one story in 2013's first quarter: lumber prices zoomed to meteoric heights, triggering the reopening of shuttered mills and increased production in Canada and the U.S.

But in the second quarter, the tale has taken a twist as prices dropped precipitously. Once nearing $450 per board foot, prices now sit at $348, nearer to the $343 lumber fetched one year ago.

Industry watchers are calling it a price correction and say market fundamentals are still strong for forestry. But they expect to see continued volatility in the short term as the industry irons out kinks in the supply chain.

"I was not surprised about seeing a decline," said Russ Taylor, president of International Wood Markets Group. "But I've been surprised about how big the decline has been in terms of prices."

Kevin Eck, a forestry analyst with Ernst & Young in Vancouver, said U.S.-based economists had likely been a little too optimistic in their predictions for the return of the U.S. housing market. The overconfidence spilled over to lumber producers.

"Mills that were operating at 75% capacity said 'hey, let's ramp it up to 95%,'" he said.

Taylor noted that a mill in Washington and one in Oregon he visited in January had plans to add shifts at that time; at the end of May, they were temporarily shut down.

While mills were pumping out lumber, there were logistics problems in getting the product to market after low production during the recession.

"The whole U.S. supply chain was in disarray," said Taylor. "There was a combination of railcar shortages in Canada; there were mills starting up and inventory buildups."

China is also a factor, with what Eck called "ridiculous" growth over the past few years now slowing.

Taylor still expect 2013 to be a good year for lumber producers, but companies will still struggle with the effects of emerging from a period of slow growth: finding enough skilled workers, railcars, trucks and truck drivers. Credit continues to be tight in the U.S., a factor that also affects the businesses.

While the forestry business has always been cyclical, Eck said the ups and downs are now occurring in a shorter period of time.

"High prices always bring out new supply, and we'll see this over and over again over the next three or four years," said Taylor. "Unless you have long-term demand, you're going to see more of these ups and downs."

Taylor expects to see prices start to rise in July.

"We're expecting demand to increase 10% a year for the next two or three years," said Taylor. "Those are big numbers." •

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