Chicago, IL, March 15, 2007--Widespread talk that some western Canadian sawmills would be scaling back lumber production sent Chicago Mercantile Exchange lumber futures up sharply on Wednesday, trade sources said.
But the gains failed to hold and analysts predicted futures would continue to drift lower as the production curtailments, thought to be between 85 million and 100 million board feet, would not be enough to bring supplies and demand into balance.
U.S. lumber production totaled more than 38 billion board feet in 2006, according to the Western Wood Products Association. Canadian softwood production in 2006 totaled 33.6 billion board feet, according to Statistics Canada.
Sawmills have not scaled back production enough over the past year to bring supplies in line with eroding demand from the struggling U.S. housing market, analysts said.
"The industry got geared up for 2 million-plus housing starts and now you're down to 1.4 million. What little curtailment we've seen so far, I don't think that brought supply and demand anywhere near in balance," said Curt Cunningham, president of Pacific Futures Trading.
Lumber futures have fallen nearly 30 percent from a year ago, and almost 50 percent since their peak in mid-2004.
The CME March lumber contract, which has posted contract lows in nine of the past 11 trading sessions, ended 50 cents higher at $238 per thousand board feet after hitting a session high of $243. May ended up $4.20 at $256.20 after rising the daily limit early to a session high of $262 while July was up $2.80 at $271.80.
deepening crisis in the subprime mortgage sector, which lends to buyers with poor credit at higher interest rates, is now threatening to tip the housing market into a deeper slide as more homes come on the market, some via foreclosure.
Subprime represented about one-fifth of new home loans in 2006, according to the Mortgage Bankers Association.
Some banks have also tightened lending standards on other, less-risky borrowers.
"When you look at the subprime mortgage market and how many homes that might be put back on the market through foreclosure, and the fact that you've got a record number of unsold homes on the market right now, you have to be much more concerned about the demand side of the (lumber) market slipping away than some negligible production curtailments," Cunningham said.
Warmer weather should draw more lumber demand from home builders in coming weeks, but most have not started building large inventories yet for spring projects.
Some home builders have reported increases in order cancellations, which has cut into profits at companies such as Toll Brothers and Pulte Homes Inc.
Analysts also said the lumber futures market's oversold condition made it prone to an occasional bounce, although prices should remain in a narrow range and drift lower as long as supplies outstrip demand.
