Market Insights: Lumber Prices Through the Roof

Macroeconomic and Market Developments:

• Stock markets in North America were slightly weaker this week. In the US, the Dow Jones Industrials was down 0.46% and the S&P 500 Index declined 0.12%. In Canada, the S&P/TSX Composite was down 1.29%.
• The Canadian dollar was positive this week, closing at 80.15 cents vs 79.95 cents USD last Friday.
• Oil prices were mixed this week, with US WTI closing down this week at US$62.00 vs US$63.10 last Friday, and the Canadian WCS flat again this week staying at ~$49.00.
• Gold prices were flat this week, closing unchanged at ~US$1,776.
• Monday was Federal Budget day in Canada. Highlights from the budget include a change to Old Age Security as seniors who will be 75 or older as of June 2022 will receive a one-time $500 special payment this August and will increase payment for pensioners 75 and older by 10% on an ongoing basis beginning in July 2022. Also, COVID emergency support programs will be extended for wage subsidies, rent subsidies and lockdown support for businesses, as well as increasing the number of weeks through which individuals are supported under the Canada Recovery Benefit and Canada Recovery Caregiving Benefit. New initiatives include establishing a national early learning and child care system, and expansion of the Canada Workers Benefit, to provide support of $8.9 billion over the next six years, and introduction of a $15 per hour minimum wage.
• On Tuesday, Canadian National Railway (CNR) announced a proposal to combine with US railway Kansas City Southern (KSU), creating a bidding war with Canadian Pacific Railway (CP), which had launched its own a takeover offer for KSU last month. Based on yesterday's closing price of CN shares, CN's proposal is valued at $325 per share, which represents an implied premium of 45% when compared to KSU's unaffected closing stock price on 19-Mar-21 (before CP’s takeover offer) and an 21% improvement over the current agreement with CP.
• Calgary-based tech company Absorb Software announced that it has agreed to be acquired by a US private equity firm. Absorb counts major clients including Anheuser-Busch and Uber, producing cloud-based Learning Management System software that allows companies to offer training to employees and their extended supply chain online. Terms of the deal weren’t made public, but the deal is estimated to be worth over $500 million.
• On Wednesday, the Bank of Canada announced that it will be maintaining its overnight interest rate at the effective lower bound of 0.25%, with the Bank Rate at 0.5% and the deposit rate at 0.25%. The big change in the announcement is that the central bank will be reducing its Quantitative Easing program. Effective the week of April 26, weekly net purchases of Government of Canada bonds will be adjusted to a target of $3 billion, down from $4 billion per week.
• Total global cases of COVID-19 finished this week at 145.1 million, with the total deaths at 3.08 million. In Canada, total cases now stand at 1,155,834, with active cases at 86,768. In Alberta, total cases are 177,087, with active cases of 19,182.
• For a deeper dive, the US investment company First Trust has put out a US COVID-19 Tracker. Click here: COVID TRACKER

Charts of the Week:

The cost of lumber is “going through the roof”, hitting the housing industry on all fronts. Lumber prices have received much attention this week, and rightly so. For home builders, renovation contractors and DIYers, the cost of projects is now far higher than it was a year ago. Even if it has only been a few weeks since you last looked at the price of lumber, you will probably be surprised by the incredible jump. The chart below is as of Tuesday, closing at $1279 (per thousand-foot board). Today, it is a little lower at $1239. That is a 23% increase just this month. On a year-to-date basis, prices are up 73% and from a year ago, an unbelievable increase of 290%! What is playing into this skyrocketing cost? Likely a combination of people trying to lock in low interest rates before they rise and of strong demand for housing, possibly due to pent up demand from the lockdown last summer, giving builders more incentive to increase production. Increased demand for single-family housing, much of it driven by the pandemic, has housing starts up 30% year-over-year, according to the US Census. In addition, through the pandemic there has been a surge in remodeling instead of people spending their discretionary savings going out or on travel.

Source: Bloomberg Finance, Connected Wealth

However, one must look a little deeper at the dynamics of the lumber market to understand why such an enormous price jump is possible. Lumber has had extreme prices moves in the past across its long-term history, but the current environment of historically low but rising interest rates, rising inflation, and the pandemic, has likely been a perfect storm making this surge by far the largest in the last twenty years. The primary reason for its sharp moves up and down is the fact that the lumber market is both extremely small and illiquid. As shown below, it is rare for lumber to trade more than 1,000 futures contracts in a single day, and current volumes haven’t moved up much despite the parabolic price move. To give you some perspective on just how small trading volumes are in this market, the total value of contracts traded (second chart) is very rarely more than the trade value of some of the smallest stocks in the US Russell 1000 index. Due to this low trade volume and value, it is likely important not to get too carried away with price moves like this that are caused by trade volumes that number in the hundreds per day, which in our view will likely be short lived and we will probably see this price drop back a few hundred dollars. We are not saying this price change on a relative and absolute basis isn’t real in the here and now, but the effect of this spike may not bear out in the longer term.

Source: Bespoke Investment Group

In Canada this week, national homes price indices for March showed the same sort of record price appreciation we are seeing in the US. In addition, the CMHC released its housing starts data for March (annualized number of new residential buildings that begin construction during the previous month) and the number came in at very strong 335,200 vs. an expected amount of 250,000, in addition to revising its February number up by 29,675 for a beat of 114,975 annualized starts. As the following charts show, after adjusting for seasonal patterns, Canadian home prices in March rose just shy of a record pace (annualized month-over-month). This has been driven primarily by extremely strong price gains in Southern Ontario, with Hamilton and Toronto prices close to doubling since 2014. The Prairies have been by far the weakest area, with Calgary and Edmonton right at the very bottom of this big city list unfortunately, but recently prices are starting to come around slowly.

Source: Bespoke Investment Group

 

Sources: CNBC.com, Globe and Mail, Financial Post, Government of Canada, Johns Hopkins University, oilprice.com, Tony Dwyer, Canaccord Genuity, Bloomberg Finance LP, Connected Wealth, Bespoke Investment Group