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(Jacques Boissinot/Jacques Boissinot/CP)
(Jacques Boissinot/Jacques Boissinot/CP)

Credit crunch an unusual ally in U.S. lumber rally Add to ...



U.S. lumber futures prices have soared about 30 per cent in the past five months, with bets rising 18 per cent since January with help from an odd ally - a credit crunch in the industry.

Lumber distributors -- who channel supplies from mills to end users -- finding it difficult to raise loans to buy lumber in the cash markets are resorting to buying futures as a hedge and to possibly take delivery when a contract expires.

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Lumber supplies available to distributors in the cash market have also been shrinking due to a pick up in the housing market in the wake of a mild winter in the country.

“Distributors are having trouble buying lumber in the tight stocks environment and also they can’t get capital from banks so they’re buying futures,” said Brian Leonard, a futures broker and analyst for Leonard Commodities Inc. in Chicago.

Open interest in lumber futures is up 18 per cent and spot lumber prices are up 12 per cent since January, indicating new buyers in the futures market.

CME spot lumber traded at a low of $211.10 (U.S.) per contract in early October and reached a 2012 peak of $279.00 on March 8, a 32 per cent gain in value.

The distributors buying futures on exchanged-set margins need only pay a small amount of the actual value of a contract.

“One contract of lumber is now worth about $28,000 and you can own a futures contract for $2,100. They’re buying on margin, which is what the futures market is for,” Leonard said.

“I have customers who have a good 50 to 80 per cent more volume in futures than they used to own,” Leonard said.

Credit crunch For lumber distributor Jim McShirley, a third generation owner of Indiana lumber distributor Sulphur Lumber Inc. in Muncie, Indiana, lenders have become tight-fisted.

At a time when business is picking up, McShirley’s bank bailed on him, giving him six months to find an alternate lender despite his well-established credit worthiness.

“We’ve seen mildly better building activity and it’s been a splendid winter for construction, one of the best I’ve ever seen,” McShirley said. But, he said “there are huge credit issues, it’s a tight market for credit. More and more banks are getting out of the commercial construction lending business.”

“We are a 76-year-old company. I’m not bragging but we have a spotless credit rating and we had to switch from a bank we had been with for 50 years,” he said.

Chris Palmer, a commodity trader for lumber distributor and broker American Lumber in Birmingham, Alabama, said lumber futures were boosted in part by demand from distributors because of the mild winter boosting business and also due to difficulty in financing and sourcing lumber needs in cash markets.

“We do buy futures, take delivery here and business is picking up,” he said. “It’s been a long four years but the banks we do business with are starting to loosen up, it is looking better,” Palmer said.

Palmer said it was becoming easier to obtain credit from banks due to the increase over the winter in construction projects, better demand for lumber and signs the depressed housing industry may have reached a bottom.

Housing market healing Despite tight-fisted lending rules imposed on builders by bankers, the housing market appears to be healing albeit slowly and brisk home building due to the mild winter is not the only reason for the uptick in the housing sector.

“Certainly the mild winter has helped, it’s a seasonal business and the winter allowed them to get ahead with their building plans,” said Robert Denk, a senior economist for the National Association of Home Builders.

Denk said the data supporting a recovery of housing was more substantial than a one-off boost to the sector because of good winter weather that allowed active construction.

Shawn Church, editor of Random Lengths, a weekly publication for the lumber industry, said U.S. consumption of lumber last year totalled 34.3 billion board feet, up 4.3 per cent from the previous year.

“There has been some recovery in the consumption the past couple of years but it has been slow,” Church said.

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