By Myra P. Saefong, MarketWatch
Lumber futures rallied on Tuesday, hitting price limit moves on the Chicago Mercantile Exchange for a second session in a row, finding support as wood product makers cut output to offset losses in demand as the COVID-19 pandemic hits the construction market.
“Producers are all rolling out their COVID-19 responses with production curtailments in the last week or so helping to limit the recent collapse in pricing,” said Greg Kuta, an analyst and president of Westline Capital Strategies.
The most-active May lumber futures contract settled at $307.40 per 1,000 board feet on Tuesday, up $25.40, or 9%. Prices, based on the most-active contracts, marked the biggest one-day percentage gain since Jan. 5, 2010, when prices rose about 13.5%, according to FactSet data.
The contract traded as high as $309 on Tuesday, up $27 from Monday’s settlement to hit the expanded price limit move on the CME (NAS:CME) Prices on Monday settled at the limit price move of $18 higher, or 6.8%, at $282.
“Demand is the speed boat that turned on a dime in response to the virus and the production side is the oil tanker plodding through the water right now, trying to turn as well,” said Kuta. He estimates that housing demand, which offers an indication of lumber consumption, will fall by 50% to 75% in April and May “judging by the drop toward the end of March.”
The most recent data from the U.S. Commerce Department revealed that builders started construction on new homes at a pace of 1.6 million in February, down 1.5% from an upwardly revised 1.62 million in January. The data, however, cover a time before coronavirus became a major concern. Data on March housing starts will be released on April 16. See the economic calendar
Top lumber suppliers have already announced cutback. Weyerhaeuser Co. (NYS:WY) announced on March 30 that it was “adjusting operating capacity at certain manufacturing facilities. The company expects to reduce operating capacity by about 20% for lumber in April.
Earlier this month, West Fraser Timber Co. Ltd. (TSE:CA:WFT) said it would reduce its spruce-pine-fir (SPF) production by 30 to 40 million board feet per week, which represents between 45% and 60% of its SPF production.
The collapse in lumber prices—the severity and sheer price drop is “truly unprecedented,” said Kuta. Year to date, most-active lumber futures have lost more than 25%.
“The mills need to react and ultimately do more to stop the free fall lower in pricing,” Kuta said.
‘Determining what month the demand returns will be a thankless job for all.’
Greg Kuta, Westline Capital Strategies
“All the business now is a rush to finish existing projects...[and] any new business residential and commericial is likely to get shelved until” after the Fourth of July or until after Labor Day, he said. “I don’t see any real resumption of normalcy until at least a good month to 6 weeks,” and realistically, maybe not until later this fall into next spring.
“The supply side will catch up down the road and when demand does kick back in, then we will see a big spike back to the upside in prices as physical supply doesn’t exist to meet the initial demand,” Kuta said.
So there is “value down here in futures” prices, he said. Still, “determining what month the demand returns will be a thankless job for all.”