Following a sharp pull back in 2010, which extended into 2011, there are clear signs that the fundamental drivers of demand for forest products are gaining strength heading into the new year.
The most visible evidence of this strength is the improvement in U.S. housing demand reflected by the steady, gradual acceleration in sales of existing homes and the concomitant increase in their prices.
According to S&P Dow Jones, the S&P/Case-Shiller Home Price Index reached 146.08 in October. That was its highest level since August 2010, up 4.3% year-over-year compared to +2.9% year-over-year in September.
According to David Blitzer, Chairman of the Index Committee of the S&P Dow Jones Indices, “looking over this report, and considering other data on housing starts and sales, it is clear that the housing recovery is gaining strength.”
Consistent with the increase in house prices and given steady improvement in the National Association of Homebuilders/Wells Fargo National Housing Market Index since the middle of 2011, the total number of building permits issued hit a thirty-nine month high in November.
The combination of a rapid increase in demand for lumber fuelled by the acceleration in apartment starts over the past six months — against a background of low lumber inventories and reduced mill capacity — has driven framing lumber prices to their highest level since May of 2006.
Lawrence Yun, chief economist of the National Association of Realtors, has been quoted as follows: “home sales are recovering now based solely on fundamental demand and favourable affordability conditions.”
Moreover this recovery has occurred in the shadow of the “fiscal cliff.” Although there are lingering concerns regarding the potential impact of cuts to U.S. government spending, the approval by the U.S. Congress of legislation which permanently puts in place most of the temporary tax cuts originally set out by the Bush administration in 2001 should provide a significant boost to both business and consumer confidence through the first quarter and extending into the second half of the year.
Given this brighter outlook for U.S. housing demand, the prospects for Canada’s lumber exports now appear stronger than they have since 2006.
This view is reinforced by certain provisions within the Canada–U.S. Softwood Lumber Agreement: the elimination of the 5% export charge together with removal of all quota restrictions on Canadian lumber exports which takes effect when the composite price for random lengths framing lumber exceeds $355/MBF (one thousand board feet of lumber).
Canadian softwood lumber production vs U.S. softwood lumber prices