3 reasons why lumber prices could stage a late summer rally, according to Bank of America

3 reasons why lumber prices could stage a late summer rally, according to Bank of America
A Lowe's employee stocks lumber inside the home improvement store in New York. Reuters/Shannon Stapleton

Lumber prices could be due for a late summer rally after falling more than 70% from their peak in May, Bank of America said in a note on Tuesday.

The commodity, an instrumental material in most home construction, has experienced heightened volatility this summer as supply and demand shocks sparked by the COVID-19 pandemic hit lumber yards and sawmills across the US and Canada. Lumber futures were down 7% in Tuesday trades, and are down more than 20% in July.

But Bank of America believes the continuous boom and bust cycle for lumber could once again enter the boom phase over the next few weeks.

"A better-than-expected demand outlook would prompt an inventory rebuild and could spark a large move in pricing," BofA analyst George Staphos and team said.

These are the three reasons why lumber prices could rebound over the next few weeks, according to Bank of America.


1. "Prices should bounce off cash cost."

The lumber futures market looks to have stabilized at prices right around the cash cost for producers, Bank of America highlighted.

"The high end of the cost curve (Canada) is ~$500-600/MBF, about where prices are currently. We would not expect pricing to drop much below this level, as it would prompt high-cost producers to reduce supply," BofA explained.

An improved demand outlook from the housing sector could also help boost lumber prices well above the cash cost for producers.

"Our industry contacts and research suggest that spending on lumber in non-wholesale markets has perhaps bottomed, even as there are comments in the trade that we have heard suggesting that construction labor could be gradually improving," the note said.

2. "Wildfires could keep supply firm."

"It's that time of the year," BofA said, alluding the growing prevalence of wildfires in western regions of the US and Canada.


"Ongoing wildfires in the western regions of the US and Canada have raised concerns on supply constraints. A state of emergency has already been declared in British Colombia and Canfor Corp. recently said it would trim output given the impact of wildfires on transportation and supply chains," BofA said.

"Ultimately, there is risk that wildfires could continue to impact supply, potentially helping lumber prices firm," BofA added.

3. "Hurricane season is just on the horizon."

The National Oceanic & Atmospheric Administration forecasted a highly active hurrican season this year, with a likely range of 13-20 named storms and 6-10 hurricanes, according to the note.

"This could put pressure on supply (and upward pressure on prices) in the US South should weather conditions impact logistics and mill operations," BofA said. Hurricanes can also cause demand spikes in lumber as homes are boarded up in preparation for a bad hurricane, and if rebuilding efforts are needed after the storm.