Dead Cat Bounce
It is time to start preparing for lower prices in the short term but a hot market in the future.
We’ve seen this before. Remember the COVID market?
A shock to the system and supply chains of the hardwood lumber industry.
Everyone braces for impact and tries to slow (or stop) production.
Prices start to crater, everyone and their mother says, “name your price I just want it gone”.
A large share of large producers sell off their kiln dried inventories and cut way back on production.
We all twiddle our thumbs for a bit.
And then whatever shock to the system subsides.
We all twiddle our thumbs for a bit longer.
Order velocity starts gaining momentum.
Finally, we all realize no one has any lumber.
Prices dart back up and for a year or the industry cannot find a supply/demand balance.
The trade war with China is bearing similar hallmarks of what happened during COVID. We are rightfully in the doom and gloom portion of the cycle. A massive, unforeseen shock to system, large scale production curtailments, etc.
Add into this the thousands of containers worth of lumber that every exporter to China is looking to dump to the market and you have a real mess.
The trade war, like the acute shock from COVID will end. And when it does it will take a few months to start back up the big machine that is the hardwood sawmilling business.
The United States is woefully under supplied in new single-family homes. Of course, with interest rates going UP over the past few weeks, consumer confidence tanking, and trillions wiped out in the stock market there is not a rush of folks looking to build and/or move.
Those who build new homes, will sell their homes and every new home built is an exponential opportunity for our industry.
For example.
My family is looking to build a house. Our magic number for interest rates is 5.5%. Our new house will have hardwood lumber in it. The new occupants of our current house will likely want to buy new furniture, change our cabinets, and do whatever else new homeowners do.
This happens so on and so forth down the line. Those in their starter house will buy the house of the people who bought my house and I will build a new house. Boom! Three possible transaction points for our products.
The markets over the next month (longer if this doesn’t end soon) are going to feel like the bottom is dropping out (in many species it seems the bottom just might be). But that is not the new market. That is just panic selling.
If a sushi bar is offering two for one roll because their cooler broke down, that is not the new market price for Sushi. That is just a guy trying to move all his products before the fish spoils. As soon as the cooler is fixed the prices will immediately go back up to where they were.
Demand during COVID was sensational. But if you really dig into the numbers two core things happened in succession.
It seemed even more busy because the market was dead for about five months. Once it took off there was a coupling of both pent-up demand and new demand actualizing at the same time.
Supply at the mills could never catch up with the first wave of pent-up consumer demand. Once the new demand started there was no hope of an equilibrium between supply and demand. Whom amongst us doesn’t remember lift drivers taking packs from the paint line directly to trucks who were waiting?
If this happens again, the effects of low supply will be even more pronounced due to industry contraction over the past two years. Sawmill production over the past year has not been exactly stellar. I think the term “historically low” has been used more than once.
And by the way, when this war does end, the largest market for American hardwoods who is today buying next to nothing from the US mills will all at once start buying massive quantities. And they are all are going to start within seconds of a deal getting made. The domestic FAS markets could be in a for a (big) shock when this happens!
It is hard to be enthused today if you are the mill level. It seems all bad. I get it guys. Stay strong!
Finally, earlier today, I searched my email box for email threads from around mid-March 2019. If you take out the words COVID and put in CHINA you would not be able to tell if they were from way back then or right now. Try it yourself. You will see what I mean.
In a few months’ time we should be singing a different tune.
Keep the faith.