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Monday, May 21, 2012

Chinese Construction Slows With Economy; Will U.S. Lumber Prices Respond?

There are more signs that China's economy is showing signs of stress. Their central bank moved once again to reduce the ratio of deposits to loans that banks in the country are required to carry, a move that is seen as an effort to "stimulate" the flagging construction industry and capital investment in other sectors.





Last week, economic Chinese professor and blogger Patrick Chovanec wrote an article entitled "China Real Estate Unravels", in which he explained house the slowdown in housing will inevitably lead to a slowdown in China's Gross Domestic Product (GDP). In the article, he included the following table which is really laid out nicely; it shows how falling property sales impact, in order, construction starts, land sales, rushed project completions, increased unsold inventory, slowdown in investment, and pullback in foreign investment.

http://www.economonitor.com/blog/2012/05/china-real-estate-unravels/

These trends do not necessarily mean bad things for our economy here in the U.S., but it does mean, if the trend holds true, that the Chinese demand for North American lumber will continue to soften. Which means that our lumber prices will not have strong support from the Pacific rim as we've had in the past couple of years.

In January, I forecast a stable market for lumber this year, with slightly strengthening prices throughout the spring driven in some part by all the bubbly news out of D.C.


But as you can see, my forecast calls for a softening of lumber prices this summer, and reduced demand from China will reinforce that slump. However, in perspective, the market is relatively stable as housing starts (mostly apartments) pick up here, and oil prices remain soft and stable as the Middle East remains quiet.




Perhaps the lumber market can outperform my forecast for the remainder of the year...if so, that would be a good thing for lumber producers here, which haven't had much to cheer about for a while. In lumber markets these days, no news is good news.

But watch out if the Middle East flares up...then all bets are off.



1 comment:

PennwoodI3 said...

Nice article. Don't buy any lumber "futures".