Lumber prices sag as interest rates climb

Home Channel News, July 17, 2000 by Elizabeth Consavage

Framing sticks, plywood and oriented strand board mired in year-long slump

NATIONAL REPORT -- When Potlatch Corp. laid off 340 of the 600 workers at its Lewiston, Idaho, plant in May, the wholesale price of framing lumber was $324 per 1,000 board feet, down $95 from a year ago. Those employees went back to work on June 26, but that didn't alter the fact that prices for lumber, oriented strand board and plywood across the country have been volatile in early summer, leading producers to slow down their production to reduce excess capacity in the market.

Lumber prices fell $10 per 1,000 board feet during the last week of June, a 3 percent decline from the week before. Plywood and OSB also had lower prices, declining 3 percent and 8 percent, respectively, between the third and fourth weeks of June.

PaineWebber, in a recent price update, said lumber prices are becoming an issue for the home improvement sector. But the brokerage still expected demand to pick up in the second quarter after the seasonally-slow period around the Fourth of July.

"There will be pressure, it appears, for the remainder of the year. But I would in no way suggest that this means something horrible for this industry," PaineWebber analyst Aram Rubinson said.

Through the fourth week of June, lumber prices for the year had decreased 31 percent from the same time in 1999. The price of OSB fell 44 percent and plywood by 37 percent. The Seattle Times reported on July 2 that lumber for July delivery fell to $268.40 per 1,000 board feet the previous week on the Chicago Mercantile Exchange, the lowest price since November 1998. Futures prices were down in late June by 36 percent from a year ago. (As the accompanying chart shows, prices for Western lumber have been affected more than lumber produced in the East.)

But, Rubinson said, this year's prices are being compared to 1999, when OSB and plywood were in shorter supply and prices in accordance with demand.

"Last year, the numbers were pretty high," Rubinson said. "So you're comparing these prices with those, and they're not going to measure up."

Home building slows

The biggest impact on recent lumber prices has been the decreasing demand for product, as home-building activity slows nationwide. The Commerce Department reported that housing starts in May were off 3.9 percent, to a seasonally adjusted annual rate of 1.59 million units, the lowest level in a year and considerably below most analysts' expectations. The Wall Street Journal reported on July 2 that Fishkind & Associates, a marketing research firm, is predicting declines in housing starts of 20 to 30 percent in Florida alone this year. The culprit has been rising interest rates.

"We see that there is some softness in the market, but there are so many factors that affect the market," said Todd Hixson, division manager of lumber and panel products for Do it Best, the dealer-owned buying group. "Overall, [low demand] is the single largest reason."

"A lot of the major players in the Northwest have shut down shifts or mills for at least a week. There's a huge amount of inventory right now," noted Gary Rubin, a spokesman with the Western Wood Products Association in Portland, Ore., who was quoted by the Times-News in Idaho Falls, Idaho.

Rubin and others pointed to other factors -- including increases in imports from Canada, improved mill efficiency and recent job action by woodworkers in the coastal region of British Columbia that saw 12,000 workers at 70 companies go out on strike in late June on the heels of extensive mill shutdowns by producers to rationalize oversupply -- as contributing to the current lumber pricing decline.

Industry analysts believe the outcome of that strike, coupled with longer-term home-building activity, will be strong indicators of the lumber market's future.

For the time being, suppliers are looking to reduce their inventories, which in some respects has further exacerbated the excess supply situation. Many dealers have bought more lumber than they can sell. "Sometimes you can't sell your wood fast enough," Hixson said in late June. "I don't think we'll go much further before mills start slowing down."

How all of this is affecting retail prices, though, is a bit hard to tell, although it does not appear that dealers have been lowering their prices in line with the market's overcapacity, especially those selling primarily to homeowners and remodelers.

Hixson foresees a similar pattern in prices over the next six months, although industry analysts don't expect radical price changes during the remainder of the year. While the problem is not drastic, companies that are not well financed could have difficulties. Some marginal lumber producers could be forced to shut down for periods of time until prices bounce back.

"We could see some real problems, some closures, some bankruptcies with the office wholesalers," Hixson said. "I don't think it has to get too much worse for that to happen."