Lower early demand for lumber predicted - Brief Article

Home Channel News, Jan 24, 2000 by Matt Layman

Analyst says producers need to be in sync with market's ebb and flow

Producers of lumber and panels need to react more quickly to market conditions if they are to sustain profitability in the next few years, when consumption may tail off.

If housing starts, as predicted, fall 6 percent in 2000 to between 1.5 million and 1.55 million units, there will be less demand for lumber and panels. If engineered wood products and steel continue to make inroads, there will be less demand for lumber. If the export market improves as expected, that will offset some of the loss domestically.

Regardless, the United States and Canada will produce only what they can consume and export. But we know from experience that lumber and panel producers are not proactive in adjusting production to "expected" consumption. Rather, they react to what is happening.

Therefore, lower consumption begets lower production, but not necessarily simultaneously. In fact, not likely simultaneously. So before lower consumption begets lower production, it begets lower prices from oversupply.

As was the case during the last half of 1999, this year will be a buyer's market, which will periodically be interrupted with production curtailments when prices reach the pain threshold of producers.

Because it is very expensive to shut down a mill and start it up again, we can project when those curtailments will be. Two major shutdown times will be July 4 and Dec. 25. Prolonged downtimes ranging from two to four weeks can be expected, depending on how nasty prices get.

Leading to those periods, customers will work inventories down to very low levels, and we will get under-bought rallies.

We will see customers build inventories into mid-winter because they are uncomfortable with their exposure to spring sales. The Farmer's Almanac predicts bad weather in March, which could make spring inventories last longer than expected. This would put the market on a long slide from March through June, with minor restocking rallies along the way, but remaining primarily a bear market from spring to summer. Then we will get a healthy rally when under-bought customers must deal with summer shutdowns. After production returns and prices recover, dealers will sell off for the fall season. We should get an under-bought rally mid-fall that will not stick, with the bottom of the market coming early winter.

Tear this out and hang it on your wall. We'll compare notes this time next year.

Matt Layman is the publisher of Layman's Lumber and Panel Guide. His bimonthly pricing forecasts can be found in every issue of NHCN's Pro Dealer magazine.