OSB leads new explosion in lumber pricetags
Purchasing Staff -- Purchasing, 2/17/2004 2:00:00 AM
Prices of oriented strand board (OSB), a plywood substitute, hit an all-time high last week, according to various trade sources that cite "torrid" overall lumber demand in California, which offset winter slowdowns in Midwest and East Coast buying. At $549/1,000 sq ft (msf) last Friday, the composite price for OSB was $283 or 106% above year-ago levels.
Analyst Chip Dillon at CitiGroup Smith Barney says prices for western OSB and fir plywood, both widely used in residential and commercial construction, have reached record levels. AT $374, the benchmark framing lumber composite is 22% above year ago because of a backlog of orders and tightening domestic and imported supplies. Low mortgage rates and strong home construction, continued uncertainty over the U.S.-Canada softwood lumber dispute, and lower domestic production have helped prolong the lumber rally. Bad weather not only affected demand but also supply, as producers experienced operational and distribution problems.
However, harsh winter weather across the eastern U.S. has raised concern over the state of that region's housing market and whether a nascent Eastern slowdown in wood buying will deepen nationwide. Several analyses of market conditions forecast a slowdown in demand and a softening of prices into the second quarter of this year. Lumber demand looks "very healthy," comments Equity Research Associates, but with mortgage rates off their lows, housing starts could peak soon and decline more quickly than expected if employment does not improve. Also, "with prices at these current high levels, supply is certain to ensure the rally doesn't last," Equity Research says. Resource Information Systems Inc. (RISI) also expects the demand and price rally for lumber to soften in March.
At the same time, the economic forecasting division of Paperloop.com still forecasts lumber prices to increase 5-10% overall this year. The key factor in this outlook is a tentative agreement reached on December 6, 2003 between the U.S. and Canada on resolution of their softwood lumber dispute. Under the proposed settlement, Canada would have duty-free access to 31.5% of the U.S. market for lumber. Shipments above the 31.5% market share would be assessed a tax of $200 per million board feet. The new quota deal is expected to raise prices in the near term with initial uncertainty over the quota driving prices higher. Once the quota is imposed, it will limit supply from low-cost producing regions of Canada. This will push marginal lumber demand to higher cost regions. RISI also anticipates that the quota will make prices more volatile by increasing the slope of the cost curve, lowering Canadian market share as demand increases, and increasing Canadian market share as demand falls. RISI has confirmed that, while expected price levels for North American lumber have been modified, the market's predicted profile for this year remains the same. Price inflation is expected to peak in the first half and move slower in the second half.
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