Lumber Mills Expand as Prices Rise Most Since 1993: Commodities

North American mills are sawing lumber at the fastest pace in six years after a recovering U.S. housing market, a beetle infestation in Canada and increasing Chinese demand drove the biggest price surge in two decades.

About 55.5 billion of the industry’s standard board feet will be made this year, 6.7 percent more than in 2012, CIBC World Markets estimates. Futures will average $371 per 1,000 board feet on the Chicago Mercantile Exchange in the fourth quarter, according to the mean of nine analyst estimates compiled by Bloomberg. The forecast is 9.2 percent above the November contract and the highest for the period since 1996.

Builders started work on the most new U.S. houses in almost five years last month and China’s economy is expanding at the quickest rate in more than a year. Supply is being constrained by the worst pine-beetle infestation on record in Canada, the biggest exporter. More than half the commercial pine in British Columbia, the largest timber-producing province, has been lost to the outbreak, government data show.

“For the first time ever, we have a recovery in North American housing alongside a very robust China market, and Canada cannot go back to peak production any time soon,” said Gerry Van Leeuwen, a vice president at consultant International Wood Markets Group in Vancouver who has worked in forestry for four decades. “The combination is raising prices worldwide.”

Beetle Outbreak

November futures, the only CME contract expiring in the fourth quarter, fell 1.5 percent to $339.80 this year. Lumber surged 44 percent in 2012, the most since 1993. The Standard & Poor’s GSCI gauge of 24 commodities fell 3.4 percent since the end of December, and the MSCI All-Country World Index of equities rose 8.7 percent. A Bank of America Corp. index shows Treasuries returned 0.8 percent.

The strength of U.S. housing surprised mill owners, who had curbed production because of the recession and beetle outbreak, said David Elstone, an analyst at ERA Forest Products Research in Gibsons, British Columbia. Canadian output fell to 23.7 billion board feet last year from a peak of almost 36 billion in 2004. Supply won’t reach that level any time soon, he said.

Weyerhaeuser Co., which manages 20.3 million acres of timberland in North America, will report a 72 percent jump in profit this year, according to the mean of nine analyst estimates compiled by Bloomberg. Ainsworth Lumber Co., which harvests and replants forests across three Canadian provinces, will report a more than threefold advance in its most widely tracked earnings measure, the mean of four estimates shows.

Housing Starts

Shares of Federal Way, Washington-based Weyerhaeuser, which also manages timberland in Uruguay, have risen 9.7 percent to $30.51 since the end of December, extending last year’s 49 percent advance. Those of Vancouver-based Ainsworth Lumber added 44 percent to C$3.90 and will reach C$4.94 in 12 months, the average of four estimates shows.

A 2,400-square-foot home in the U.S. typically uses about 14,400 board feet of softwood lumber, according to the Washington-based National Association of Home Builders. Sales of new single-family properties advanced 1.5 percent in March, completing the industry’s best quarter since 2008, Commerce Department data show. Housing starts climbed to a 1.04 million annual rate last month, also the fastest since 2008.

The surge in lumber prices is increasing costs for construction companies. Toll Brothers Inc., the largest U.S. luxury-home builder, paid about $3,000 more per home in material and labor costs in its fiscal first quarter ended Jan. 31. Lumber accounted for $2,000 of the increase, Chief Executive Officer Douglas Yearley told a conference March 4.

Property Curbs

North American lumber exports to China surged 17-fold to 3.5 billion board feet since 2006, according to International Wood Markets Group. The nation of 1.35 billion people, which builds as many as 15 million mostly multi-story houses a year, mostly uses lumber for scaffolding, pouring concrete and forming bricks, according to International Wood Markets’ Van Leeuwen.

While China’s economy is accelerating again after two years of slowing growth, the 8 percent expansion projected for this year by economists surveyed by Bloomberg would be the second-weakest in the past decade. Thirty-five city governments issued details of property curbs by April 1, a month after former Premier Wen Jiabao raised down-payment requirements for second mortgages in some cities and told local governments with the biggest price increases to tighten home-purchase limits.

Idled Production

Even if U.S. housing starts doubled they would still be below the peak they reached in 2006, Commerce Department data show. The National Association of Home Builders/Wells Fargo index of builder confidence fell for a third month in April, to its lowest level since October. Mills probably will bring back idled production, increasing lumber supply, said Paul Jannke, an analyst at Forest Economic Advisors LLC, an industry consultant in Westford, Massachusetts.

Homebuilders “don’t need to be building significantly more houses to meet demand,” said Jannke, who expects lumber futures to average $320 in the fourth quarter. “Demand was stronger than expected, and producers didn’t build up enough logs in the fall. Production will be moving up.”

Starting up an idled lumber mill can take as long as 12 months, said Robert Denk, a senior economist at the National Association of Homebuilders. Demand from export markets cultivated during the U.S. economic slump also will tighten supply, he said.

“With the rise of China, you can see prices increasing worldwide as that mixes with the pressures brought on by demand in the U.S.,” said Elstone of ERA Forest Products Research. “China doesn’t have much option but to pay up. If you want lumber, you’re going to have to pay up.”

Red Pine

Prices are also rising in Russia, which has the world’s largest forests. China increased imports of red pine and spruce from eastern Russia, according to Garrett Soden, the chief executive officer of RusForest AB, a Stockholm-based producer which harvests timber and runs sawmills in Russia.

Russian lumber prices rose 10 percent to 15 percent in the past six months, and RusForest is diverting “as much as possible” of its Siberian production from its traditional markets in the Middle East and Africa to customers in China and Japan, Soden said.

“The lumber industry is coming out of a deep recession that diminished capacity at all levels, and now it’s bumping up against constraints,” said Joshua Zaret, an analyst at Longbow Research LLC in New York. “Russia has huge softwood forests that are relatively untapped. But for now, the fact is that China will still come to North America.”

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