We are currently experiencing an extraordinary drop in plywood pricing from the historic highs reached in previous months. Plywood pricing has dropped 65% from highs of $2105/msf in July to $800/msf at the beginning of August, according to Random Lengths.
Lumber futures, which indicated the same magnitude of drop, have reversed course and are now on a slight upward trajectory. OSB and plywood lagged the dramatic market drop by a couple of weeks, but indications are that we will mimic the same market actions that lumber has already experienced. This is the classic “when do you catch the falling knife” scenario, where markets freeze until a catalyst moves the market to buy again and a new equilibrium is established.
We expect increased volatility in wood products prices to continue. This is especially true for structural panels. The wood products markets are not operating as efficiently as they used to, largely due to the slow 12-year recovery from the 2009 financial crisis.
Years ago, trading floors were willing to take positions on large volumes of wood products to potentially realize inordinate gains. This was the essence of the free-market system where risk was rewarded with in-kind profits. These players no longer exist. Rather, the risk is pushed back to the manufacturers, who adjust production levels to current market conditions. The result is less inventory in the pipeline, leading to a tumultuous marketplace where there is little inventory to weather the peaks and troughs. In other words, there is greater volatility as less consistent supply is available from primary manufacturers.
In the short-term, the wood products markets care more about the events that disrupt supply than the costs that manufacturers bear. The cost of timber, resin, labor and every other input that goes into making a plywood panel have increased significantly over the last year. The markets are currently struggling with the question of where the new panel products price floor is.
Production is quietly being reduced across the Northwest. We have struggled to maintain 60% of our pre-COVID crisis plywood production levels. Even with the decreased production, West Coast panel producers are now operating short weeks as demand lags and prices decline faster than producers can react to the input prices. COVID is still an issue as some production facilities are facing quarantines for the first or second time. A large structural panel producer just announced one week of production curtailment due to market conditions.
For Freres Lumber, we plan to maintain straight time production schedules while we are able. We see risk on the horizon due to a long, dry summer and the potential for forest fires. There are currently five active forest fires started by lightning in the Willamette National Forest. Last year was a clear example that forest fires in Oregon are a true and real threat which can and will affect our operations. Pray for rain!
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