An improving housing market and renewed export demand from China caused lumber prices to rally to an eight-year high late this year, but lumber futures prices are expected to fall in 2013 as production ramps up, according to Forest Economic Advisors LLC.
On Monday, contracts for March delivery of lumber were selling at $374.80 per 1,000 board feet on the Chicago Mercantile Exchange. That's 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 this year. Exports to China also grew as its 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 Massachusetts-based consulting firm.
Jannke said lumber producers will likely 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 between $300 and $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. 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 downward market correction, 2013 is expected to be a strong year for lumber producers as the U.S. housing recovery continues to pick up speed.