Excess supply causes lumber prices to plunge
By Judo Marcelonis -- Industrial Distribution, 10/1/1998
Our last forecast for lumber prices predicted an easing of prices in 1998, providing some relief after a year of high inflation in the lumber market. Statistics show that prices have not only eased, but have actually declined.First quarter prices dropped 3.8% below prices in the same time period in 1997. The latest data reveals that in June, lumber prices plummeted a phenomenal 11.3% below June 1997 levels. The downward trend in lumber prices began in November of last year, with June's decline adding to the string of seven consecutive decreases in prices below year-earlier levels. Through the first half of this year, price levels have dropped 6.6% below prices in 1997's January to June period.
Why have prices declined given that robust demand from a thriving housing market has consumption levels running at cyclical highs? An oversupplied domestic market is the primary factor provoking price deflation. Surging activity in the residential market prompted higher lumber production. In the meantime, lumber export levels fell. Intensifying global competition from countries like New Zealand, Chile, Brazil and Scandinavian nations have rivaled the U.S. for foreign consumers and they have imported their own lumber into the U.S. to compete for market share.
Lumber exports have also been affected by weak foreign demand. In many Asian countries, economic turmoil has constrained U.S. lumber imports, most notably in Japan, one of the United States' largest lumber consumers. Producers are unable to move their usual volumes into overseas markets, which adds to domestic supply. Surplus supply has been further aggravated by competition from substitute goods.
All of the above mentioned factors and conditions have boosted lumber supply to such high levels that some lumber producers are being forced to sell their product below cost. At these price levels, producers will be compelled to implement production curtailments and to extend vacation downtime in hopes of moderating excess supply. These efforts will provide some relief to the lumber industry and will help prices to modestly recover in the July to August period. Unfortunately, the relief will be short-lived, as seasonal factors will result in tapering lumber demand throughout the rest of the year, inducing price weakening once again. A 3.8% decrease in prices is expected for all of 1998. I
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