A recent article about lumber price correlation with US stock values piqued Madison’s curiosity. While there are excellent insights, the conclusion drawn in inaccurate. That is to say: the data is being interpreted incorrectly.
“Since the outbreak of the financial crisis in the summer of 2007 and also in the years since the market bottom in early 2009, stocks and lumber have moved in complete tandem with one another. […] The high correlation between US stocks and lumber prices over the last decade is understandable.”
— Eric Parnell, CFA, Gerring Capital Management
“Second, forces have been impacting the lumber market specifically since the beginning of last year that have sparked this divergence,” says Eric Parnell, CFA, Gerring Capital Management.
“One has been the recent sharp decline in export demand. Prior to the jump in the dollar starting last summer, the export of lumber and other wood supplies from the U.S. to the rest of the world had risen by a healthy +15% pace over the previous year. But these export levels have quickly plunged back to 2011 and 2012 levels in the past year, which has stripped lumber of measurable demand.”
One should not mistake a drop in US softwood lumber exports recently as a BAD sign for US — and North American — lumber manufacturers.
Export levels of US dimension lumber products are falling because the material is being consumed within the US.
A quick look a the latest transportation data for Forest Products shows a brisk trade of softwood lumber products both within the US and from Canada into the US:
Transportation Statistics : North America
As for the most recent data of Canadian and US Softwood Lumber construction framing materials:
US imports Sawmill Products from CANADA for 2015 to FEB are up by 4.9% (from US$749 million in the first two months of 2014 to US$788 million this year) (CIF value basis) and from CHINA up by 23.20% (from US$4.74 million in the first two months of 2014 to US$7 million this year):
Canadian shipments of Softwood Lumber Products to the US for 2015 to FEB are up by 8.9% (from 3,966 million cubic metres in the first two months of 2014 to 4,353 million cubic metres this year):
British Columbia exports of Forest Products to the US for 2015 to FEB are up by 19.6% (from $0.79 billion in the first two months of 2014 to $0.95 billion this year):
SOURCE: Competitiveness and Innovation Branch, Ministry of Forests, Lands, and Natural Resource Operations
US and Canadian lumber production for 2015 to JAN are relatively stable compared to the previous year:
SOURCE: Western Wood Products Association
US and Canadian sawmill capacity utilization for 2015 to JAN also generally stable:
And, perhaps most telling, US EXPORTS of softwood logs to CHINA for 2015 to FEB are DOWN by 59% (from US$152 million in the first two months of 2014 to US$63 million this year)(FAS basis) and to JAPAN are DOWN by 43% (from US$91 million in the first two months of 2014 to US$51 million this year)
SOURCE: USDA Foreign Agricultural Service
Put together, and focussing only on domestic North America (not taking into account economic changes with markets overseas) this data strongly indicates that US sawmills are running US (and some Canadian) logs through their mills at a healthy capacity level, and US lumber is being sold first within the US before going to export, and before Canadian lumber is imported into the US.
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