2023 Lumber Prices Fall to Fresh Post-COVID-19 Lows

After surging to notable peaks of $1,400 per contract in May 2021 and a similarly impressive $1,300 in February 2022, the continuous contract prices for Random Length Lumber are currently in search of a market floor. As of May 15, 2023, prices had plummeted to $344, marking a three-year low that was only slightly surpassed by the knee-jerk collapse in prices during the initial weeks of the COVID-19 pandemic. Prior to the disruption caused by the pandemic, lumber prices had traded within a narrow range of $390 to $440 per contract.

The downward trajectory of lumber pricing has played a significant role in the overall decline of construction material prices. According to ConstructConnect's construction materials prices index, material prices have experienced annualized declines ranging from 4% to 6% in recent months. However, this seemingly modest decline obscures the stark reality of lumber's 53% price drop over the 12-month period ending in May 2023, making it one of the most severe declines among all construction commodities.

Several factors are putting pressure on lumber demand. Home construction, a significant consumer of lumber, has been particularly hard hit, as evidenced by the substantial decline in new home sales this year. This decline has been in large part triggered by quickly rising mortgage rates which have nearly doubled since early 2022.

ConstructConnect's May 2023 residential starts data, released in June, revealed a staggering 35% year-on-year decline and a 31% year-to-date fall. Unless the dynamics of the housing market improve, it is likely that lumber prices will continue to remain depressed. This rapid collapse in demand may explain why the level of lumber inventory and related materials relative to sales is at its second-highest level since 2009.

Future lumber demand also appears weak, according to data from random-length lumber trading contracts. The volume of outstanding ‘long’ lumber contract positions, which are typically used when traders anticipate future price increases, have dwindled to multi-decade lows. A clear signal that market traders have little concern for future price appreciation.

As construction materials, in general, fall in price and lumber in particular, construction firms would do well to preserve their capital by carefully managing their inventories based on current demand estimates. By resisting the urge of just two and three years ago to hold, or even hoard, excessive inventory, contractors can properly manage their exposure to further commodities price movements. The risk of having too much capital tied up in inventory that has the potential to further depreciate will unnecessarily restrain the ability of affected firms to conserve and or deploy their capital in more productive ways, especially should a recession occur.