Lumber mills expand as prices rise most since 1993

Idled Production

Even if U.S. housing starts doubled they would still be below the peak they reached in 2006, Commerce Department data show. The National Association of Home Builders/Wells Fargo index of builder confidence fell for a third month in April, to its lowest level since October. Mills probably will bring back idled production, increasing lumber supply, said Paul Jannke, an analyst at Forest Economic Advisors LLC, an industry consultant in Westford, Massachusetts.

Homebuilders “don’t need to be building significantly more houses to meet demand,” said Jannke, who expects lumber futures to average $320 in the fourth quarter. “Demand was stronger than expected, and producers didn’t build up enough logs in the fall. Production will be moving up.”

Starting up an idled lumber mill can take as long as 12 months, said Robert Denk, a senior economist at the National Association of Homebuilders. Demand from export markets cultivated during the U.S. economic slump also will tighten supply, he said.

“With the rise of China, you can see prices increasing worldwide as that mixes with the pressures brought on by demand in the U.S.,” said Elstone of ERA Forest Products Research. “China doesn’t have much option but to pay up. If you want lumber, you’re going to have to pay up.”

Red Pine

Prices are also rising in Russia, which has the world’s largest forests. China increased imports of red pine and spruce from eastern Russia, according to Garrett Soden, the chief executive officer of RusForest AB, a Stockholm-based producer which harvests timber and runs sawmills in Russia.

Russian lumber prices rose 10% to 15% in the past six months and RusForest is diverting “as much as possible” of its Siberian production from its traditional markets in the Middle East and Africa to customers in China and Japan, Soden said.

“The lumber industry is coming out of a deep recession that diminished capacity at all levels, and now it’s bumping up against constraints,” said Joshua Zaret, an analyst at Longbow Research LLC in New York. “Russia has huge softwood forests that are relatively untapped. But for now, the fact is that China will still come to North America.”

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