Lumber prices skyrocketed in November as lumber sellers with low inventory… (Sam Hodgson, Bloomberg )
Lumber had a good end of the year, with an improving housing market and renewed export demand from China resulting in prices that hit an eight-year high.
But lumber futures prices are expected to fall in 2013 as production ramps up, according to Forest Economic Advisors.
On Monday, lumber contracts for March delivery were selling at $374.80 per 1,000 board feet on the Chicago Mercantile Exchange. That was down 6.1% from last week, when prices surged to almost $400 per 1,000 board feet.
Prices skyrocketed in November as lumber sellers with low inventory tried to meet a surge in demand for domestic consumption as the number of housing starts reached a four-year high. Exports to China also grew as that country's building market showed signs of growth.
As a result, expect lumber mills, which were pummeled during the recession, to ramp up production to help satiate the demand, said Paul Jannke, principal at Forest Economic Advisors, a consulting firm in Massachusetts.
Jannke said lumber producers probably will go "from a 40-hour week to a 50-hour week" as they see solid profit margins.
"It'll be a good year for lumber producers," he said.
The high prices, however, are not expected to be sustainable.
Once production begins to meet growing demand, futures next year are expected to fall to $300 to $320 per 1,000 board feet at the start of the second quarter.
The high prices seemed to have been inflated as lumber dealers were caught off guard by the surge in orders. Lumber mills had also scaled back production capacity because the housing bust caused demand to tumble.
"The market has gotten ahead of itself," Jannke said.
Despite the recent decline, 2013 is expected to be a strong year for lumber producers as the U.S. housing recovery continues to pick up speed.
The price surge comes as a state lumber tax goes into effect Tuesday in California. The 1% special assessment, proposed by Gov. Jerry Brown and approved in September by lawmakers, is expected to raise $35 million a year to pay for the regulation of commercial forestlands and for firefighting and fire prevention.