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Lumber prices to be cut down to size

  • Even though we expect lumber demand to hold up well for some time, we still think that a rebound in supply will lead to a sharp fall in the price of US lumber over the next eighteen months.
  • The price of US lumber (CME random lengths) has skyrocketed from $875 per 1,000 broad feet at the beginning of the year to just over $1,325, which is more than four times its 2010-20 average of $325. Demand from the US housing sector has boomed in the past year. Housing starts have picked up recently (in large part owing to low existing inventories) and some households have used accumulated savings and stimulus payments associated with the COVID-19 pandemic to renovate and expand their houses. Meanwhile, regional supply issues including a shortage of truck drivers, virus-related restrictions on social interaction, and the ongoing outbreak of mountain pine beetle in Canada have also supported the price.
  • We think that demand for lumber will remain elevated over the next eighteen months. The inventory of existing homes for sale is at a record low and will remain so for some time, which should continue to bolster house prices, homebuilder confidence and, in turn, the construction of lumber-intensive single-family units. (See Chart 1 and our US Housing Market Outlook.) Moreover, we suspect that even more households will renovate and expand their properties to help facilitate homeworking, although the high price of lumber might delay some refurbishment plans.
  • Despite our positive outlook for demand, we still expect the price of lumber to decline sharply by end-2022 for two key reasons. First, we expect domestic production to soar. For one, the progressive easing of quarantine measures should allow lumber mills to return to full capacity fairly soon. In addition, the recent pick-up in hiring and higher trucker pay are likely to alleviate the current shortage of truck drivers, which should help resolve some of the logistical constraints.
  • Second, US lumber imports have increased in recent months, and they could rise further, spurred on by the high domestic price but also because of an appreciation in the value of the US dollar. (See our Global Markets Update.) What’s more, the Biden administration could (temporarily) cut tariffs on imports from Canada (the top lumber exporter to the US), which would provide a further boost to imports. (See Chart 2.) The Trump administration reduced lumber tariffs to an average of 9%, from 20%, in December 2020 in part to help the domestic homebuilding sector and there is even more impetus to cut tariffs now that the price of lumber is at a record high.
  • All told, we forecast that the price of US lumber will plummet to $600 and $550 per 1,000 broad feet by end-2021 and end-2022, respectively, as domestic supply surges and imports remain strong.

Chart 1: NAHB Homebuilder Confidence & US Single-Family Housing Starts

Chart 2: Lumber Railcars from Canada

chart001-227.png chart002-164.png

Sources: Refinitiv, Capital Economics

Sources: Refinitiv, Capital Economics


Samuel Burman, Assistant Commodities Economist, samuel.burman@capitaleconomics.com