A contract for 110,000 board feet of lumber traded for as much as $320 in mid-March before plummeting below $220 in mid-June. Now lumber is rising again and it could be one of those times when supply can’t keep up with demand. But not for the usual reasons.
Traditionally, homebuilding soaks up a lot of U.S. timber production, but the market for new houses is very soft and has been for two years or more. Timber companies have been supported primarily by exports to Asia and real estate sales. Timber producers like Pope Resources LP (NASDAQ: POPE), Rayonier Inc. (NYSE: RYN) and Plum Creek Timber Co. Inc. (NYSE: PCL) have seen share prices rise from nearly 20% to more than 80% in the past 12 months. The Guggenheim Timber ETF (NYSE: CUT) is also up more than 20% in the past 12 months. Weyerhaeuser Co. (NYSE: WY) and Lumber Liquidators Holdings Inc. (NYSE: LL) have seen stock prices fall — Weyerhaeuser when it converted to a REIT in July 2010, and Lumber Liquidators last week when the company cut its forecast for 2011.
The exports to Asia aren’t leaving the docks without controversy however. In 2010, timber exports to China doubled to $270 million when total log shipments to Asia reached a 14-year high of 1.1 billion board feet from Pacific Northwest ports, up from 700 million board feet in 2009. Prices for logs have gone up for Pacific Northwest timber, but prices in the southeast U.S. are at their lowest point in 15 years.
In the logging country of Oregon and Washington, the central issue of log exports becomes jobs. When whole logs are shipped instead of milled lumber, mills close and jobs are lost. By one estimate, for every million board feet of log exports the Northwest loses 12 jobs, mostly in family-owned and operated mills. In the past two years more than 20,000 jobs have left for Asia, and as many as 26,000 could depart in 2011, when shipments to Asia could top 1.5 billion board feet. It is important to note that logs exported to Asia are cut from private land only because U.S. law forbids exporting logs cut on public lands.
Timber companies ship more logs to Asia because demand within the U.S. for milled lumber has dried up. China, Japan, and Korea operate their own mills and want to employ their own citizens to mill the lumber imports from the U.S. Demand for lumber in Asia keeps the price of U.S. logs high.
And with high export prices come higher prices for the commodity lumber contract. Timber producers in the southeast U.S. are selling to pulp and paper mills at lower prices than milled lumber, while northwest timber producers drive up the cost of lumber even though U.S. domestic demand is very weak. It’s an unusual situation, to say the least.
Lumber Liquidators has set another 52-week intra-day low today, at $18.04, down more than 3% from Friday’s close. The shares are threatening a two-year low of around $17/share. The Guggenheim Timber ETF (NYSE: CUT) is also down more than 3% to $20.54, and the 52-week range is $17.26-$23.56.
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