Lumber Prices Hit Record Levels In 2018. Where Do We Go ... · Aug Sep Oct Nov Dec Jan Feb Mar Apr...
Transcript of Lumber Prices Hit Record Levels In 2018. Where Do We Go ... · Aug Sep Oct Nov Dec Jan Feb Mar Apr...
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Lumber Prices Hit Record Levels In 2018. Where Do We Go From Here?
MLB Annual General Meeting May 30th, 2018
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Key Topics
• Lumber prices • Currently at record nominal levels. Why? • Near-term will likely remain elevated. • When they fall, they will fall precipitously.
• How long can prices remain “elevated”?
• Lumber consumption will grow slowly but steadily over the next several years.
• Supply side constraints will hamper the North American industry’s ability to keep pace with growing consumption.
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Inflation Adjusted Lumber Prices Approach Record Levels
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700 2&Btr 2x4, Eastern SPF Del. Boston, 2017 US$/MBF
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Canadian Lumber Shipments Lag Last Years Levels
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J F M A M J J A S O N D
US-2018 US-2017 Canada-2017 Canada-2018
MMBF/Working Day
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Average Train Speeds Are Rising And Dwell Times Falling, But Conditions Remain Worse Than Year-Ago Levels
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Trucking Is Also An Issue
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$/Mile Spot Flatbed Truck Rates
Source: DAT Trendlines
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Inventories Remain Low
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Prices Are Likely To Fall When Transportation Issues Get Resolved And The Building Season Ends
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Canadian Lumber Shipments Have Begun To Rebound
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13-Jan 20 27 3-Feb 10 17 24 3-Mar 10 17 24 31 7-Apr 14 21 28
US Can US Q1 Avg Can Q1 Avg
MMBF/Week
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Capacity Is Expanding
Source: Sawmill Profiles, Forest Economic Advisors
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And More Will Come
Source: Sawmill Profiles, Forest Economic Advisors
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High Profits Are Causing Production To Surge
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So Co Inl BC Ont Que Variable Cost Duty Profit Profit %
$/MBF
Profit Margin
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Prices Will Slip In 2019, But Remain Elevated
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North American Domestic Consumption Will Grow Steadily
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US Canada
BBF
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The 2017 Level of Housing Completions Was Typical of a Recessionary Low in Previous Economic Cycles
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Annual Level of Housing Completions, Millions
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• Economic growth has increased.
• The manufacturing sector is recovering.
• Small business confidence surged in late 2016.
• Wages and salaries are growing.
• Home inventory overhang has been worked off.
• Mortgage interest payments share of household disposable income is at generational lows.
There Are Many Positive Signs For Housing Markets
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However, Supply-Side Constraints Will Slow The Housing Recovery
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Builders Are Facing Shortages of Labor and Buildable Lots
Percent of Builders Reporting Problems
13% 21%
30% 34%
53% 46%
61% 55% 71%
58%
78%
60%
82% 67%
Cost/Labor Availability Cost/Land Availability
2011 2012 2013 2014 2015 2016 2017*
Source: NAHB HMI Survey
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Residential Construction Employment Has Stalled Even as the Unemployment Rate for Construction Workers Plunged
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Employment in Residential Construction Thousands, SA
Unemployment Rate in Construction Sector, SA
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Mexico’s Fertility Rate Has Declined Sharply
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Male Female Total fertility (children per woman)
Change in Mexican Population Aged 15-34 in Thousands
Children per women in Mexico
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US Change in Labor Productivity Construction vs. Overall Economy
Source: McKinsey Global Institute, Reinventing Construction Through a Productivity Revolution
US Industry Overall
Real gross value added per hour worked, 2005$
Index:100 = 1995
US Construction Sector
Its Not Just A Lack of Labor: Productivity Declines Are Not Helping
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22
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• Credit conditions remain tight. • Regulatory burdens have increased.
– Environmental, erosion control – Energy codes – Sprinkler systems
• Many municipalities cut staff in permitting offices to save money during budget crunch. – Utility company delays – Hook-up fees – Inspection fees/delay
• Attenuated nature of the downturn knocked out many of the smaller builders giving the big players substantial market power in certain areas.
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Our Favorite Indicator for Near-Term Housing Demand is Flashing Green
Year-over-Year % Change
New Single-Family Home Sales Mapping New Single-Family Home Sales to Housing Starts
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1,000 1,100 1,200 1,300 1,400
New Single-Family Home Sales 662 683
Owner Build Share 25% 25%
Single-Family Starts Needed to Replenish Sales 896 911
Not All Starts Completed 98% 98%
Single-Family Starts Needed to Replenish Sales 910 929
Single-Family Share 70% 70%
Total Housing Starts Needed to Keep Inventories Flat
1,299 1,328
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Longer run, we are very optimistic: The United States is due for a
construction boom
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“Mary, I’m just having one more pint with the lads. If I’m not home in 20 minutes read this message again”
Irish Text Message
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US Has Been Dramatically Under-Building For Nearly A Decade
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US Demographics Are Favorable
Headship Rate (Households per Person)
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Seven Of The Ten Most Populous Age Groups Are In Their 20s US Population by Age (as of July 1, 2018)
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Peak Age Groups in 2018: 27- and 28-Year-Olds
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In Five Years, Many Will Be In Their Early 30s US Population by Age (as of July 1, 2023)
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Peak Age Groups in 2023: 32- and 33-Year-Olds
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US Housing Starts Continue Grinding Recovery
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US Recession Housing Starts Trend from 2011-2017
Housing Starts in Millions
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The Single-Family Share Should Remain Elevated
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US Housing Stock is Old
9.5 8.0 9.9
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Before 1920
1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s
Total = 134.8M units
Total US Housing Units in 2015 by Year Structure Built, %
Source: US Census Bureau 2015 American Housing Survey
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Rapid Increase in Home Equity Should Boost Improvements
$0
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$6,000
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Trend Since 1980
Owners’ Equity in Household Real Estate - Net Worth in $Bil.
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Total Home Equity Cashed Out Well Below Bubble Levels
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Total Home Equity Cashed Out, Billions
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Improvement Expenditures Should Remain Above Trend For Several Years
$70
$80
$90
$100
$110
$120
$130
$140
$150
$160
$170
1993-2002 Trend
Billions of 2009 USD
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Consumption Is Growing, Where Will The Lumber Come From? Supply Side Constraints Will Vex
Lumber Buyers For Several More Years
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The Decline in British Columbia’s AAC Has Begun
Source: BC Ministry of Forests, Lands, and Natural Resource Operations; FEA estimates
TSA Year Previous AAC, CM New AAC Difference
Lumber Tally BBF
Mackenzie 2014 3.02 4.50 1.48 0.430
Morice 2015 2.14 1.90 (0.24) -0.070
Williams Lake 2015 5.73 3.00 (2.73) -0.794
Kamloops 2016 4.00 2.30 (1.70) -0.494
Merritt 2016 2.40 1.50 (0.90) -0.262
Lakes 2016 1.98 1.65 (0.33) -0.096
Quesnel 2017 4.00 2.60 (1.40) -0.407
Prince George 2017 12.50 8.35 (4.15) -1.206
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And Its Showing Up In Production
-0.60
-0.40
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Que US Wt Inl
Alb US Oth CA Oth BC Co BC Int
2017 Increase/Decrease in Production, BBF
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Eastern Canadian Provinces Can Increase Production In the Short Run, But Longer Run Their Ability to Ramp Up
Harvests Levels is Constrained MMCM
Note: AAC includes both Crown lands and private timber, except in Ontario
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Current AAC 2016 Estimated Harvests
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Sawmill Employment Has Stalled Even as the Unemployment Rate for Wood Products Workers Plunged
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US Sawmill Employment, Thousands
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Opioid Use Contributing to Decline in Labor Force Participation
Source: Alan Krueger, Princeton University
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British Columbia’s AAC Will Take Another Step Lower in the Mid-20s
Million Cubic Meters
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Interior
Source: Ministry of Forests, Lands, Natural Resource Operations, and Rural Development
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Supply Side Constraints Will Tighten Operating Rates As Consumption Rises
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Capacity Demand D/C Ratio (R)
BBF
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Operating Rates of 90% Have Historically Meant Pricing Around $450
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Given Lumber Prices, There Is No Urgency To Reach A Deal
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We’ll Eventually Have A Deal, It’s Just Going To Take A While To Get There
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Take Home Points
• Lumber prices are at record levels. They are likely to remain there into the summer before dropping sharply.
• Construction growth will continue albeit slowly as supply-side constraints limit housing production.
• Lumber prices will remain elevated but fall from current highs.
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The Canadian Dollar Has Historically Tracked Real Oil Prices. It Will Eventually
Gravitate Toward Its PPP Level
$-
$20
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$1.10 IMF’s Purchasing-Power-Parity Exchange Rate
2017 USD per Barrel USD per CAD