Notes from the Forest, August 18th

Ladies and Gentlemen:

Lumber and panel sales continue to wilt, as extreme temperatures and high humidity levels continue to slow jobsite activity and the result is field inventories lasting longer than retailers and secondaries had anticipated.  Producers believe that field inventories are below traditional levels for this time of year.  Lack of sales and dwindling order files have put mills into one of three positions: 1) Continue to lean on those shrinking order files and hold prices steady for at least another week.  Hoping for a market rebound.  2) Offer modest discounts, particularly on excess inventory items. 3) Stack inventory and count on the traditional Septembre and Octobre sales uptick to help them sell through the increased on- ground inventory.

The U.S. Census Bureau reports that U.S. home building unexpectedly fell in July as the construction of single and multi-family homes declined. Housing starts declined <-4.8%> to a seasonally adjusted annual rate of 1.16 million units. June's sales pace was also revised downwards to 1.21 million units from the previously reported 1.22 million units. The report also showed a decline in building permits, suggesting that residential construction could struggle to regain momentum after contracting in the second quarter at its steepest pace since the third quarter of 2010.  Earlier in the week the National Association of Home Builders (NAHB) \ Wells Fargo Housing Market Index (HMI) reported that builder confidence in the market for newly-built single-family homes rose four points in August to a level of 68.  In prepared remarks NAHB Chairman Granger MacDonald said, “Our members are encouraged by rising demand in the new-home market. This is due to ongoing job and economic growth, attractive mortgage rates, and growing consumer confidence”.

Spruce & Stud Markets-:  The inquiry and sales pace of Eastern & Western Canadian SPF Std., & Btr., and No. 2 Btr., continue to fall below anticipated seasonal levels.  Buyers continue to show limited interest in the markets, as they wait to see what affect the CVD free gap might have on the overall pricing structure of the markets.  In the meantime, buyers often resorted to purchasing units from local 2-step distributors to fill pressing inventory holes, or buying discounted truckloads from secondaries with contract ownership positions that needed to be desto’d. Mills with order files into the week of 9/4 tended to hold their prices firm, while those with shorter lead times had little choice but to discount and compete with the secondaries for orders.   Sales of both low grade and stud trims were not immune to the SPF market downturn and mills were offering discounts as early as Monday afternoon to keep production sold.  CME Lumber Futures continue to give buyers, who rely on them for market direction, mixed signals. The uptick on Monday and Tuesday, gave buyers renewed confidence in the markets, but there was profit taking on Wednesday and a modest recovery on Thursday.   

Hem \ White Fir -:  The pace of inquiry and sales of Std. & Btr – No.2 & Btr, White and Hem \ Fir, retreated further over the course of the week.  With the exception of robust sales in Fir-Larch, the rest of the market required modest \ moderate discounts to keep buyers engaged, as mill order files slipped into the 7 – 10-day range. Secondaries with contract ownership, fearing further price corrections, worked diligently to move that ownership off their books, resorting to selling below mill replacement levels, to buyers willing to accept their ‘canned tallies.’ Declining prices in Canadian WSPF had buyers who can switch between species taking advantage of the lower prices, putting additional pressure on the domestic markets.  Sales of low grade stock were close to production levels and overall prices held at previously established levels.  Demand for stud trims continue to weaken, and depending on the specific mill and species, producers reported varying levels of surplus inventory and offered double digit discounts from early in the week.

Green Doug Fir -: The inquiry and sales pace of Green Douglas Fir Std. & Btr., & No. 2 & Btr., after almost 2½ months of steady gains, showed the first signs of slowing and potentially correcting this week. The slowdown in other Western species triggered buyers’ concerns about the Green Doug Fir markets; where many prices are at or remain close to all-time record high levels.  Nevertheless, mills continue to report buyers with lite field inventories engaging with them for prompt shipping truckloads, but asking for discounts to seal the deal. With mill order files getting closing in on 7 – 10-day range, mills excepted modest discounts to keep production flowing through the supply chain.  Sales of low grade remain in lockstep with production and pricing was at or near last Friday’s reported levels.  Discounting in stud trims in other species led to Green Doug Fir producers accepting similar discounts to keep sales in alignment with production and holding onto market share.

Cedar Lumber -:  The inquiry and sales pace of Western Red Cedar (WRC) boards, fencing, dimension, radius edge decking, bevel siding, timbers and pattern stock remain on the quiet side.  Quieter than many seasoned traders have seen in a long time.  Buyers are filling in as needed; as they wait further clarification and a better understanding of the pending CVD suspension, which includes, is there any chance that it will be extended past Septembre 6th. Buyers continue to press producers for significant discounts.  Mills are countering those demands by reminding buyers that raw material availability remains tight, due in part to continuing wildfires throughout British Columbia.  As a result, prices remain near record levels, and on top of that the Canadian Dollar is surging in value.  A handful of buyers not wanting to get caught short on inventory for the early 2018 building season, are in the process of making their lists for 4th Qtr., and 1st Qtr., 2018 needs. Those lists are ready to be executed if and when prices adjust to a previously established price goal.

Shake & Shingles -:  The pace of inquiry and sales of Western Red Cedar (WRC) Shake and Shingles remains lethargic.  A few producers reported a modest uptick in inquiry at midweek.  However, most of those interactions were for quotes that have been previously circulated; and for jobsite activity not anticipated before late in the 3rd \ early 4th Qtr.  Buyers did offer producers opportunities to sell limited volumes of specific items. However, the discounted prices being sought after were unpalatable to the mills, due to rising raw material, labor and insurance costs. Additional summer vacation down time is being reported as mills attempted to limit their production and on ground inventory buildup.

Southern Pine Lumber -:   The lack of any potential upside movement in the Southern Pine No.1 & No.2-dimension lumber has caused buyers’ interest in the markets to wane. Summer heat and humidity and daily pop up thunderstorms continue to hold jobsite activity back, and that is resulting in field inventories lasting longer than predicted.  Buyers continue to address their most pressing needs, oft times buying units from local 2-step distributors; as they carefully work through previous purchases, while watching prices decline modestly \ moderately across the complex. Sales of high grade stock – D.S.S., S.S., and MSR, have fallen victim to the same issues as their dimensional lumber counterparts. Producers moved prices lower from the beginning of the week, in the hopes of getting buyers re-engaged in the market, but reported limited success. Sales of low grade and stud trims remain the bright spots in the marketplace. With demand in sync with production levels, and a small order file in place, mills held prices steady.  Producers of small squares and timbers attempted to hold pricing steady on 4x4 and 4x6 and reported modest success; often having to offer discounts on the less popular lengths.  Demand for 6x6 remains active, mills have developed an order file and as a result, producers were able to lift prices higher on selected lengths. The inquiry and sales of 5/4 x 6 Standard and Premium Radius Edge remain solid.  Producers have been able to develop 1 – 3-week order files; resulting in higher prices across the complex.  Transportation issues in the South continue to give traders a case of unending heartburn, and there are no signs of improvement on the horizon.   

Pressure Treated -:  The inquiry and sales pace of pressure treated lumber, plywood and accessories have fallen into their traditional mid-August lull.  Pro dealers are reporting that jobsite activity is being held back by extreme heat and humidity, which at some point during the day leads to heavy rains and thundershowers. Large box retailers have also noted a retreat in their sales volumes, as the DIY crowd turns to cooler, less stressful activities.  Pressure treaters know that inquiry and sales activity usually perks up the week before Labor Day and depending on the weather can last well into late Octobre to early Novembre. Pressure treaters in the Southeast continue to report robust export sales into the Caribbean and Central America, which are keeping their cylinders active during the domestic markets slow down. Prices remain in lockstep with brite feedstock costs.  Ongoing and seemingly never-ending transportation issues continue to negatively impact inbound raw material shipments and outbound finished goods.

OSB & Veneer Panels Overview -:  The inquiry and sales pace of both OSB and plywood panels remain below their traditional trading levels for this time of year.  Mill order files range from 8/21 – 8/28 on plywood panels, and extended as far out as 9/11 on OSB at selected producers.   Minor price corrections on plywood and occasionally on OSB have buyers back on the defensive, trying to limit their exposure to a marketplace that lacks upside potential but continues to show only modest to moderate downside risk. Producers continue to believe that field inventories are lite and believe that once the weather finally moderates that sales will rebound. 

OSB -:  The inquiry and sales pace of OSB was described this week by traders somewhere as being somewhere between lethargic to dull.  Mill order files remain locked into the weeks of 8/28 – 9/11, unchanged from where they finished last week. After moving higher for the past several weeks, last week’s flat pricing throughout most of the OSB complex has put buyers back on the defensive.  Nevertheless, most producer believe that field inventories are lite and noted that Septembre and Octobre have been traditionally strong months for OSB sales.  This is leading mills to believe that another round of buying, perhaps significant buying could be just around the corner. But for now, those buyers in the marketplace are purchasing pressing needs and pressing producers for price concessions. Secondaries continue to report that while the premium they have been garnering for prompt shipments has shrunk, they are still able to sell their faster shipping contract ownership at or modestly above mill replacement levels.

Southern Pine Panels -: The inquiry and sales pace of Southern Pine Rated Sheathing remain below their seasonal norms.  Buyers sensing that the market is without upside potential have reverted to purchasing their most pressing needs, oft time in units, from local 2-step distributors, as they try to limit their exposure to what could suddenly become a correcting market.  Mill order files remain locked in the week of 8/21 – 8/28, and a sudden influx of imported panels arriving on the East Coast put additional pressure on domestic producers in the Eastside zone. Buyers in the market this week seemed to be focused on thinner panels and overall prices held within a few dollars of previously established levels.  As a result, there has been a sharp increase in the number of unsold thicker panels for producers to deal with.  That resulted in mills offering double digit discounts on thick panels from Monday morning going forward. The price discrepancy between Southern Pine and Western Fir panels continues to favor Southern Pine and a majority of those sales are for carload volumes, which has been a major price support for Westside mills.   The inquiry and sales pace of underlayment, sanded, siding, concrete form and other value-added panels remains steady to strong.  With 1 – 2-week order files, producers have been able to hold prices flat and firm.  Transportation issues are little changed this week, and late shipments remain a constant problem for traders.  

Western Fir Panels -:  The inquiry and sales pace of Western Fir Rated Sheathing remains on the quiet side.  Buyers are back purchasing cautiously, and the tiny cracks that appeared early in the week, on selected items, seemed to reinforce their approach to the marketplace. Mill order files remain stuck in the weeks of 8/21 – 8/28.  When producers were quoting those delivery dates early in the month buyers were concerned about purchasing at those extended dates.  Now as those dates quickly approach buyers are concerned that shrinking order files may cause a price correction, a 2-tiered market or a combination of both.  With their order files shrinking producers became more proactive as the week progressed.  Offering modest discounts on the buyers’ favorite highly mixed truckloads, offering deeper discounts for straight thickness loadings, and offering even deeper discounts on carloads. Canadian CCX buyers remain a force in the domestic markets and that has pushed prices upward and order files into early to mid-Septembre. Sales of underlayment, sanded, siding, concrete form and other value-added panels remain sneaky strong, and with order file in the 1 – 2-week range producers gladly held prices at previously established, and buyers seemed happy to purchase at those levels too.

Food for Thought-:  I have several trader friends who pride themselves on the vast number of spreadsheets, charts and graphs that they use to help predict the movement in the lumber and panel markets. I have been told by some of them (not necessarily known for their modesty) that their systems are nearly ‘fool proof’.  They boast that they can predicate accurately when the markets will be going up or coming down. For the most part, from what I can observe, their ‘fool proof’ system is 50% - 55% accurate, regardless of their proclamations.

So, over the past several weeks I couldn’t resist speaking with them to see if their graphs, charts and spreadsheets accurately predicted the extraordinary wide swings we have experienced in the lumber and panel markets of late. To a person they all told me that it is impossible to predict the unpredictable. How could anyone or any chart predict devastating wildfires, unbelievable triple digit heat and high humidity, a veneer mill fire, the dearth of available trucks and railcars, or the escalations of tension across the world. Exactly my point!

I value and actually admire their diligence in keeping records and converting them into graphs, charts, etc.  I appreciate when they take the time to share them with me.  I have to admit that I am a lumber and panel number junkie as well. Friday evening you can find me locked in my office doing price comparisons between this week and last and using more than one reporter.  I use the number to tell me many things but I also leave lots of room for the unpredictable, and of late there sure have been a lot of that.  And this is just food for thought

Courtesy of Joe "In the Forest" Glitman Contact Joe on Linkedin

Key Words:   Notes from the Forest