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Six Reasons It’s a Great Time to Buy Hardwood Lumber

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Six Reasons It’s a Great Time to Buy Hardwood Lumber

History Suggests Price Increases in 2020

Prices for several species of hardwood lumber from North America have fallen rapidly since last summer, coinciding with the implementation of tariffs on hardwood lumber exports to China.  Slower growth in China’s economy and political uncertainty in Europe have contributed to price and volume declines, as well.  Historically, lower hardwood lumber prices have eventually encouraged stronger buying, lifting prices off their cyclical bottoms.  As such, the current downward trend should be nearing its end (though trends don’t always repeat), and prices should begin increasing again in 2020.

Buyers Are On Hold

Foreign buyers have delayed purchasing as hardwood lumber prices have fallen, trying to take advantage of lower prices down the road.  Even large price drops have not yet enticed buyers back.  Northern KD 4/4 #1 and #2 Common Ash prices, for example, have fallen $60/m3 and $30/m3 since June, respectively, but have yet to prompt stronger exports.  However, the longer buyers wait for lower prices, the more their inventories will shrink, requiring larger replenishments and increasing the urgency to re-stock when they finally decide to buy.  That will work to raise prices faster than they would rise otherwise.

#1: Lumber Prices are Near Cyclical Lows

Lumber prices have gone through four main down cycles over the last 20 years, as indicated by our kiln-dried price index, which represents the average prevailing price of seven indicator item.  Each cyclical low has been higher than the last, suggesting prices should have already risen, as the current index level is under its 2015 low (Figure 1).  The last two downturns lasted about 18 months each; we are 16 months into the current downward cycle, suggesting prices should rebound in a few months.

Figure 1.  U.S. hardwood lumber price index (average published price of 7 key hardwood items) (Hardwood Review).

#2: Price Declines Are Slowing

Appalachian KD 4/4 #2 Common 90/50 Red Cherry and #1 Common Red Oak prices have been among the hardest hit in the current downturn.  As such, their recovery might signal a change in market recovery.  Prices for #2 Common Cherry and #1 Common Red Oak fell about $13/m3 per month in the second half of 2018, but have only fallen by about $6/m3 since March 2019, indicating that price declines are slowing.

#3: Prices Are a Bargain, Historically

There have been four prominent spikes and five prominent declines in Appalachian KD 4/4 #1 Common Red Oak prices since 2000, with prices trending lower overall (Figure 2).  Growth in exports to China accounted for two of the spikes (2004, 2018), while fears of supply shortages accounted for the others.  The inflation-adjusted (to year-2000 U.S. dollars) #1 Common Red Oak price is at a 20-year low, meaning there’s no better time in recent history to buy than now.  Buyers waiting for further price erosion should know that the #1 Common Red Oak price was $215/mhigher five years ago, and those cost savings should be hard to pass up.

Other species are also at cyclical lows.  Appalachian and Northern KD 4/4 #1 Common Ash prices (averaged across regions and adjusted for inflation) have fallen nearly 30% ($155/m3) since last summer.  Since 2007, each cyclical price low has been higher than the one preceding it.  Again, with history as a guide, the #1 Common Ash price should start trending higher, as it is already within $15/mand $25/m3 of the two most recent cyclical lows (Figure 2).  Buyers who wait for Ash prices to fall even lower could instead see prices rise quickly, as the Ash supply is low due to tree mortality caused by invasive species.

The inflation-adjusted price of Appalachian Area 2 KD 4/4 #1 Common 90/50 Red Cherry is at its lowest level since we started tracking it in 2004, making it a bargain, as well.  The price rose $220/m3 from 2009-2018, but has fallen 40% since last summer (Figure 3).  Producers have little incentive to saw Cherry at its current price, and lower production will work to level out supply-demand imbalances and lift prices over time.  Purchasing now, however, would net the biggest cost savings in a decade.

The inflation-adjusted Appalachian KD 4/4 #1 Common Walnut price climbed to a record high last summer but has fallen nearly 25% ($174/m3) since, and to within $30/m3 of its 2016 low.  Walnut producers are also limiting production, hoping for better balance between supply and demand.  While not at historic lows, buyers who purchase Walnut are paying considerably less than the peak prices of 2015 and 2018 (Figure 3).

Figure 2.  Prevailing Appalachian KD 4/4 #1 Common Red Oak prices, and combined Appalachian and Northern KD 4/4 #1 Common Ash prices (inflation adjusted)(Hardwood Review).

 

Figure 3.  Prevailing Appalachian Area 2 KD 4/4 #1 Common 90/50 Red Cherry and #1 Common Walnut prices (inflation adjusted) (Hardwood Review).

 

#4: Better Supplies Available

Weaker Chinese purchasing has created opportunities for smaller markets that otherwise would have been competing against China for available lumber—and losing out—unable to match China’s sheer order volume and frequency.  In August, we analyzed secondary markets that had the greatest additional purchasing potential moving forward.  Of the six markets we identified (Korea, Estonia, Saudi Arabia, Turkey, Denmark and Honduras), all but Turkey had purchased more U.S. hardwood lumber year-to-date through July, and Turkey’s volume decline was minimal (just seven fewer container loads).  Secondary markets accounted for 7% of U.S. hardwood lumber demand year-to-date through July, compared to 5% last year.  If China purchases considerably higher volumes next year, however, then foreign buyers will be competing for lower available supply.  Lumber production capacity has dwindled in 2019 due to mill and yard closures.  Production capacity could be reduced even further in 2020, and landowners hold onto their hardwood timberland until log prices rise.

#5: July Data Suggest Export Volume Minimums

U.S. hardwood lumber exports fell in May and June.  Exports also fell in July, but the decline was fractional, and exports actually rose slightly to Asia, Latin America and the Middle East.  Chinese purchasing in July was nearly identical to June, and volumes to China had risen in more months (4) than they had declined (3) through July.  Exports to Vietnam, Canada and Mexico have trended higher in 2019, while shipments to the UK have been steady, despite three years’ worth of Brexit uncertainty and despite predictions that UK purchasing of U.S. hardwoods would slow.  Said another way, U.S. export lumber volumes appear to have stabilized at a new minimum shipment volume.  When volumes rise from those levels, higher lumber prices will follow.

 

#6: The Trade War and Tariffs Will End, Eventually

We thought the U.S.-China trade war would last a few months and end with a new deal once both sides realized they had too much to lose economically.  We were wrong, like everyone else.  In-person U.S.-China trade talks are scheduled to resume in October, however, offering some hope for progress.  Foreign buyers could see further price declines in the short term, but they should also be aware that upward price shifts in some of the hardest-hit species are increasingly likely.  Eventually there will be a new trade deal, or tariff reductions, that will result in stronger monthly exports and greater market stability.  Even a modest return in Chinese purchasing could result in quick price turnarounds.

Tony Burbeck
Editor
Thank you to our friends at Hardwood Review. Reprinted in its entirety from the 10/1/2019 edition of the Hardwood Review – Global publication with permission.  For insight into our hardwood markets, consider subscribing to a number of publications produced by the HardwoodReview, www.hardwoodreview.com.

As always, if you have timber you may be interested in selling, and want a long-standing professional forestry firm representing your best interests in the process, please don’t hesitate to call any of our FORECON offices.  Our foresters would be very happy to speak with you about the markets, and more importantly, your goals and objectives for your land.

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2019-11-19T04:07:50+00:00

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