“TEXTBOOK CASE” FOR PRICES
A TD Economics analysis of the “wild swings” in lumber prices during the first half of 2010 says they are the result of a “textbook case” of supply and demand.
Dina Cover, a Toronto-based economist with TD, says lumber prices jumped by 50 per cent in the first four months of this year to a high of US$367 and then dropped back by 30 per cent to US$247 by the end of the second quarter. TD has downgraded its lumber price forecast for the rest of 2010, but does say lumber prices should trend upwards to US$340 by the end of 2011.
“North American producers had been slashing production so much throughout 2009 that output was at or below final demand levels,” said Cover while noting that inventory stockpiles had also been reduced. “So at the start of the year when year-over-year demand did turn positive, as the U.S. housing market began to show some signs of life and buyers began to restock inventory, production fell short of consumption.”
Cover went on to say that when supply finally met demand at the end of April and began outpacing it in May and June, prices were expected to fall, but not by the amount they did. Additionally, she says a continued lack of demand in the U.S. and overseas will keep prices down in the near term, adding that prices will continue to be affected by supply. “As long as producers don’t get too excited about the seasonal bounce in prices and are disciplined enough to keep output in line with demand, prices – which may lose some steam following the seasonal uptick – are not likely to fall below current levels.”
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