4 reasons why lumber prices have doubled from summer lows — and why one expert sees them normalizing again
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- Lumber prices are on the rise once again and have doubled from summer lows.
- A confluence of factors is putting upward pressure on the red-hot commodity but experts say lumber will normalize.
- Lumber futures rose for the fifth-straight session on Friday, hitting $930 per thousand board feet.
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The price of lumber has doubled from summer lows after a confluence of factors put upward pressure on the red-hot commodity, but some normalization may be on the way soon.
Lumber futures rose for the fifth-straight session on Friday, hitting a six-month high of $930 per thousand board feet and gaining 21% for the week. Still, they're 45% below their record high of $1,711 reached in May.
Analysts have highlighted four key factors contributing to the recent spike.
1. Floods in Canada
The main cause is severe flooding in British Columbia that has hampered the operations of West Fraser Timber, one of Canada's largest lumber producers, according to Ross Price, director of finance at commodity trading platform Mickey Group.
West Fraser on November 30 said the natural disaster caused transportation disruptions to its rail and truck routes, including limiting access to ports for overseas shipments.
"This has closed roads and caused one of the world's biggest producers of lumber to pause shipments," Price told Insider, adding that the US gets most of its lumber supply from Canada. "From my perspective, it doesn't make much sense for a supplier to produce more than they can actually ship right now."
2. Hoarding
Exacerbating this issue is construction companies that are hoarding materials to avoid shortages, said Vanessa Miller, a partner at international law firm Foley & Lardner.
"This is actually creating the same type of shortages that we saw early on in the pandemic," she told Insider, noting the infamous toilet paper stockpiling the US saw last year despite the lack of an actual shortage.
If the lumber supply chain was functioning properly, the price increases would not be so dramatic, Miller added.
3. US tariffs
Adding to lumber prices is a trade dispute, in which the US has accused Canadian suppliers of dumping. Late last month, the Commerce Department confirmed it will impose a nearly 18% tariff on imports of Canadian softwood lumber producers in 2022 — more than twice the rate of 8.99% during the Trump administration.
The Biden administration initially unveiled the plan in May, causing some lumber yards to stock up and increase their orders before the tariffs kicked in.
4. Hot housing market
Tying these all together is the sustained, elevated focus in home building and home improvement since the start of the pandemic.
While the Federal Reserve has started to curb bond buys, its ongoing emergency stimulus policies continue to keep mortgage rates low, stoking further demand in the housing sector. And with the work-from-home trend continuing, Americans are still feeling free to hunt for new homes in new markets.
Why another pullback is likely on the way
Traders can expect lumber prices to retreat in the near term as mills come back online and consumer behavior — along with overall economic activity — return to normal.
Still, don't expect prices to fall all the way back to pre-pandemic levels, David Russell, VP of market intelligence at TradeStation Group, an online broker-dealer. But the likelihood of a return to May's peak levels is "also probably overreacting," he told Insider.
Instead, he sees lumber prices settling around $500 to $600 per thousand board feet, roughly 45% lower than the current levels.
"This is the aftershock of that huge earthquake," Russel said, referring to the spring price rally. "After this, we will see the volatility decrease and things will start to stabilize."