A Correction in Lumber?

Is the lumber market in a correction or is the bull market over? The CoT data shows traders are leaving the market and we are seeing more long liquidation. Lumber prices have fallen more than 42% since May's record high of over $1,700 per thousand board feet, although they remain more than 150% higher for the year.

However, prices may have further to go on the downside. Lumber prices have been driven by the pandemic as there has been huge demand for wood for all of those home improvement projects that have spiked during the pandemic. Another factor is the souring house prices reasulting from very strong demand.

These kind of price increases attract the hedge funds and speculator and this drives prices up. But if these speculators get the jitters from something like higher inflation numbers for example, then they start to book profits, head for the exits and rotate into other asset classes. In addition, higher prices dampen demand and commerical interests and consumers may even defer buying until prices correct to lower levels. Lets take a closer look.

The latest lumber production and sawmill capacity utilisation rates data out of the Western Wood Products Association, for March 2021, shows improvements in both Canada and the U.S. There is increased production at the sawmills and supply chain issues are being resolved as business and the economy reopens and more wood is moving through the pipeline. It is possible the top of softwood lumber prices has been reached, and buyers out-wait suppliers expecting lower prices now.

Housing activity and demand across North America is very strong and there is a huge demand for wood, so the question now is: will increased lumber production at sawmills and a flowing supply chain satisfy demand for ongoing construction projects? The summer building season is in play and U.S. and Canadian home buying and house price growth continues to expand at a rate of knots.  However, no one really knows if supply-demand balance has been reached.