By LIAM PLEVEN
November 2, 2012
The extensive rebuilding that is expected in the wake of Sandy's devastation is adding kindling to an already-hot market for lumber.
Prices of lumber futures, which kept trading through the storm, jumped 5% to $319 per 1,000 board feet over the past week, reflecting expectations of higher demand as homeowners and government officials across the Northeast wrestle with the challenge of renovation and reconstruction. Lumber futures are now at their highest level since March 2011, after the Japanese earthquake and tsunami.
The gains brought lumber's rise in October to 14%, its biggest monthly rally in almost two years. Lumber is now up 29% in 2012, outpacing other industrial materials and commodities, including copper, oil, gold and natural gas, even though Chinese demand is faltering.
The sudden need for building materials comes at a time when lumber already is in demand and inventories are low, thanks to a recent rebound in new-home construction in the U.S. That is likely to keep pushing prices even higher, investors and analysts said.
"The bottom line here is that there's a wave of demand," said Chris Palmer, a lumber trader at American Lumber Distributors & Brokers Inc. in Birmingham, Ala. "There's more housing coming."
Government data showed single-family home starts rose 43% in September compared with a year earlier. The average new home needs about 15,000 board feet of lumber, according to the National Association of Home Builders.
Even before the storm, hedge funds, pension funds and speculative investors had increased the number of their bets that lumber prices would rise. As of Oct. 23, the number was up 27% compared with three weeks earlier, while bearish bets were near the lowest level for the year, according to government figures.
The storm has led buyers to ramp up purchases, according to Brian Leonard, an independent trader based in Chicago who said he has bullish bets on lumber for clients. "You bring a storm down the pike, and it kind of spooks people," he said.
The full impact of Sandy on demand for construction materials could take months to be felt. Homeowners need to clean up and assess the damage, then get insurance money to fund repairs, say traders and analysts.
A month or two after a major storm, "You start feeling the pinch for product," said Bill Karr, a risk manager for Chicago-based distributor Cook County Lumber.
Mr. Karr said prices for March delivery could rise to $400 or above, in part due to the storm's impact. That would represent at least a 19% increase from Thursday's settle price for the March contract. Mr. Karr said he has bullish bets in place on the November, January and March contracts.
Prices have helped drive up shares of publicly traded lumber producers. Shares of Weyerhaeuser Co., which is based in Federal Way, Wash., and manages 20 million acres of North American timberland, are up 49% this year, outpacing the Dow Jones Industrial Average's gain of 8.3%.
At the same time, the gains could eat into home builders' profits, which have surged this year amid signs that the housing market may be recovering.
The storm already is affecting the cash market for plywood, often used as a short-term patch, said Carl Chretien, who owns a construction firm in Saco, Maine. Plywood cost about $15 or $16 in his area last week, but "has shot up to over $22 a sheet," he said. Mr. Chretien is arranging to purchase a "contingency reserve" of lumber because he expects the poststorm rebuilding to push up prices, which he said could start to happen next month.
Still, the recent gains in prices pale in comparison to the instant pop seen following Hurricane Katrina in 2005, when lumber futures rose 15%.
Also, production is rising, and the U.S. churned out 16.7 billion board feet this year, a 7% increase from the same period last year, according to data from Western Wood Products Association, a trade group.
Firms are trying to boost production further. Canfor Corp., based in Vancouver, said Wednesday it has reopened a British Columbia sawmill that was idled in 2009 amid "poor market conditions."
But there are supply constraints. Deadly explosions sidelined two sawmills in the Canadian province this year, and mountain pine beetles are damaging trees. Mr. Karr said labor shortages are making it difficult to boost production further.
Meanwhile, dealers have let inventory dwindle after years of hoping for a housing revival that repeatedly stalled before it got going, Mr. Palmer said. "Even the mills were caught napping on this one," he said.
Stronger lumber demand in the U.S. is helping overcome waning appetite from Chinese buyers. Exports from the U.S. and Canada to China have dipped 4% this year through August, said Jon Anderson, president of Random Lengths, a trade publication in Eugene, Ore.
"China has slowed down," said Mr. Anderson. "We've seen a flattening."
China has emerged in recent years as a major source of rising demand for lumber from North America. But the current rally shows how sensitive commodity markets now can be to the large but slower-growing U.S. market for raw materials.
A version of this article appeared November 2, 2012, on page C1 in the U.S. edition of The Wall Street Journal, with the headline: Storm Gives a Jolt to Lumber Market.
NOTE: In accordance with Title 17 U.S.C. section 107, any copyrighted material herein is distributed without profit or payment to those who have expressed a prior interest in receiving this information for non-profit research and educational purposes only. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml