Forest industry struggles to meet stronger housing demand -But price increases seen moderating in 2013

PHILADELPHIA (MNI) - U.S. lumber prices have risen sharply in the last year on rebounding housing starts, and are expected to post further gains in 2013 as the housing market continues its recovery at a faster pace than the forest products industry rebuilds capacity lost during the recession, executives and industry experts said.

A composite price of 15 grades of lumber calculated by Random Lengths, an industry publication, rose to $360 per thousand board feet in the week of Nov. 30 from $355 the previous week, and $266 a year earlier.

The strong rise in the Random Lengths Framing Lumber Composite Price, an industry benchmark, reflects strong recent gains in housing starts which rose to a seasonally adjusted annual rate of 894,000 in October, up 3.6% from September, and 41.9% higher than the year-ago level. In a sign of future growth in housing demand, building permits rose to a seasonally adjusted annual rate of 866,000 in October, almost 30% above their level a year earlier.

As lumber manufacturers experience stronger demand, mills will struggle to keep pace because some were shut or downsized in response to the 2009-10 housing crash, and many skilled workers left the industry for jobs in the booming domestic oil and gas sector, experts said.

Overall capacity in the U.S. and Canadian lumber industry slid from 81.9 billion board feet (bf) in 2006 to 72.9 billion bf in 2011 as demand for construction lumber slumped to 48.5 billion bf through the same period, according to RISI, a business information provider for the forest products industry.

Now, the combination of growing demand and lagging supply is likely to push prices up further as the housing recovery gathers pace in step with the wider economy, said Bob Berg, principal economist for lumber at RISI.

"Next year is going to be rock and roll," said Berg.

He forecast the Crow's composite price index, another industry benchmark, will rise 10% in 2013 to an average of $346 per thousand board feet.

In 2013, aggregate demand is expected to grow to 54.6 billion board feet, but that's still far short of the 74.5 billion in the housing boom of 2005, and which is unlikely to be repeated in absence of another housing bubble, Berg said.

Rebuilding a skilled work force will be a challenge for many mills which will be forced to add shifts to meet demand, said Berg. But finding the workers won't be quick, and could be expensive -- with implications for wood-product prices -- if mills rehire employees who have migrated to high-paying oil and gas jobs in the last few years.

While most mills are running at less than 80% of capacity, they are already adding shifts and more will do so as the market picks up, he said.

"We probably have enough capacity to meet demand next year if they add shifts," he said.

But any delay in stepping up production could drive prices up given currently rising demand, said Mark Pawlicki, a spokesman for Sierra Pacific Industries, the second- largest U.S. lumber company, based in Anderson, Calif.

"If the market continues to go up then we have a problem," Pawlicki said.

He predicted that demand will be boosted in part by demographics. "There are lots of people coming into the household formation age," he said.

For now, the strongest lumber demand is coming from the repair and remodeling market, which is exceeding that for new homes, Pawlicki said.

Mark Jaffe, president of Friend Lumber, a retailer based in Hudson, NH, said this year's rise in lumber prices is quite large by historical standards but he doubts that the rate of increase will continue in 2013 because of lingering doubts about whether the recovery in the housing market, and in the economy overall, will be sustained.

Jaffe, whose firm serves southern New Hampshire and the Boston area, said the housing crash starting in 2008 forced him to cut capacity by half, including laying off half his work force, and he won't be rebuilding it until he sees clear signs of a durable increase in demand for lumber from builders and retail customers.

For now, uncertainties including the federal health care implementation and taxation levels are preventing him adding capacity. In the short term, he will cope with any increased demand through overtime, although that's not needed now, and is unlikely to be through the current "slack time" until mid-April, he said.

"I would rather my people be overworked than to make a mistake and take on more people that I couldn't afford," he said.

Jaffe, who employs 53 people, predicted lumber prices may rise another 10-15% in the first quarter of 2013 but then retreat in response to an increase in supply spurred by rising demand from the construction industry.

RISI's Berg warned that trucking costs may also contribute to rising lumber prices because of recession-related closures in a the trucking industry and a shortage of drivers to replace a retiring generation of older drivers, reducing capacity to meet demand from lumber companies.

In early 2013, mills may not be able to keep up with demand as they try to rebuild work forces and restart shuttered plants, Berg said. But production and inventories should be higher by the second half of the year, aided by a gradual improvement in credit availability, all leading to a probable softening of prices toward the end of next year.

Housing starts, already well off their recession lows, are likely to hit 920,000 in the last two months of this year and rise further to 1 million by the end of 2013, Berg predicted.

Despite the rising demand, some mills are reluctant to invest in restoring lost capacity because of persistent doubts about the durability of the economic recovery, said Shawn Church, editor of Random Lengths, a leading publisher of data and analysis for the forest products industry.

"Lumber manufacturers severely cut back capacity and they have been slow to bring it back because of uncertainty about the sustainability of the market," Church said. Macroeconomic concerns including the presidential election, the long-running European debt crisis, and now the "fiscal cliff" have deterred many companies from investing in additional capacity, he said.

Production by U.S. and Canadian mills is up just 7% so far this year, including products for export, sharply lagging the gain in housing starts over the same period, Church said.

Economic uncertainty, coupled with tight credit conditions, has hindered inventory buildup, forcing manufacturers and distributors to meet demand by frequent just-in-time purchases, and fueling the recent rise in prices, Church said.

"A lot of companies that distribute lumber don't have the money to carry inventories, so they are buying hand-to-mouth and that's feeding the upward surge in the market," he said.

The industry's efforts to meet demand have also been hampered by an infestation of the mountain pine beetle in western forests, cutting their productivity, and recently by prolonged wet weather in the Pacific Northwest, hindering harvesting, Church said.

In another sign of a strengthening market, the latest price rise is occurring at the end of the year, bucking a traditional softening as demand drops during the holiday season, Church said.

"I'm surprised we are going into winter at the highs of the year," he said.

Within the housing market, demand for multifamily buildings has surged as tighter post-recession credit availability has stopped many people buying single-family homes, boosting the demand for rental properties. Multifamily housing starts now account for about a third of the total, Church said, up from the traditional level of 15-20%.

Editors' note: Reality Check stories survey sentiment among business people and trade associations. They are intended to complement and anticipate economic data and to provide a view into specific sectors of the economy.

The U.S. Labor Department is scheduled to release data on November producer prices at 8:30 a.m. eastern time on December 13.

Source: MNI

Posted and edited by Riona, Hanbao News Department

Contact: rionach@cltimber.com