Spot lumber prices, as reported by the industry publication Random Lengths, headed lower in the final months of 2014 before tumbling in the first 4months of 2015. At the end of April, spot spruce pine fir (S-P-F) 2×4 #2&Btr mill prices stood at $249 per thousand board feet (mbf). Last year in April, this figure was $367/mbf.

The volatility in lumber prices can be traced back to changes in the demand and supply drivers. On the demand side, new home construction continues to present its unpredictable trend. After dipping 7.6% in quarter-over-quarter (q/q) terms in the first quarter because of weather conditions, total US housing starts are expected to grow 13.4% q/q in the second quarter. According to the Commerce Department, US housing starts advanced 22.2% in April and contracted 11.1% in May in month-over-month terms.

Despite the volatility, the trend is moving in the right direction, which will support lumber prices in the near term. Looking at the demand from overseas, one can note the exchange rate effects as well as dwindling demand from China and Japan. While the US exports to China and Japan fell sizably in the first 3 months of the year, Canada was able to increase its exports due to better exchange rate conditions. Nevertheless, falling Chinese imports has been another demand factor that has helped pull down prices since the beginning of the year.

Throughout the first quarter and so far into the second quarter, we have seen slowing US lumber production paralleling the slower housing-market recovery. Despite the decreasing production, US total lumber supply increased modestly in the first quarter with the surge in imports and a contraction in exports. Because of tumbling prices in the first quarter, there have been several reports of temporarily idled mills on the West Coast and US production levels slowed down. As the price recovers in the second quarter, production will also begin to increase in the United States, making up for the slower imports.

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