It was dead wood, now lumber is the ‘new oil’
Leo Lewis, Asia Business Correspondent
Locked in a 16-year down-cycle and ending the decade as the most dismal commodity performer, lumber is poised to become the crude oil of the new decade.
It all depends, analysts say, on Chinese building codes and the financial mathematics of 150 million new kitchen tables.
In one projection, the mass urbanisation of China over the next ten years could see lumber prices soar by more than 300 per cent, driven by a combination of unprecedented demand and the same flood of speculative money that gave the world $150 per barrel oil in 2008.
Optimism over the prospects for lumber has been growing steadily for some months — cautiously, because investors in the forestry sector have been disappointed many times before.
However, recent clarifications to Chinese building codes have stoked rejoicing.
The new calculations about lumber demand come at the end of one of the commodity’s longest and worst bear markets for a century.
On the final trading day of 2009, when commodity performance for the past decade was totted up, lead, sugar, gold and copper were unsurprisingly high on the list, having delivered huge returns in the region of 300 per cent.
Lumber lost 32 per cent over the period.
But lumber bear markets have always been followed by price rises above 100 per cent.
And, if the commodity is on the verge of a new bull run, the good news, Barclays Capital analysts say, is that the shortest upswing for lumber since 1900 lasted 12 years.
The beleaguered Canadian lumber producers, David Watt, of Royal Bank of Canada, wrote, have long hoped for a catalyst that would raise demand for a range of wood products in China and crack open this huge market.
This breakthrough appeared to come from Shanghai, where, two months ago, the local government issued “the most comprehensive and detailed code for wood-frame structures in China”.
The new code, which sweeps away much vaguer guidelines, in effect allows Chinese building needs — the titanic construction effort associated with accommodating 20 million people every year moving from rural China to the cities — to be met by modern wood-frame construction.
Lumber products, particularly those made in Canada and Russia, may now be in hot demand as a cheaper way of putting up new housing.
The Chinese national budget has set aside $141 billion (£88 billion) for the production of 20 million square metres of affordable housing by 2012.
“We had cheekily said Canada was moving from a nation of hewers of wood, drawers of water and assemblers of motor vehicles, to a hockey-mad nation of bankers, insurance adjusters and real estate agents,” Mr Watt wrote.
“That might have been premature. Lumber might be the next decade’s oil.”
Within Canada’s lumber industry, there are suggestions that exports to China could soar by 100 per cent over 2009 levels, which were themselves double those of 2008.
China already has a huge supply shortfall of wood, and analysts see that continuing at the level of about 160 million cubic metres a year for at least another decade.
China’s consumption of wood, forestry analysts say, is already “incredible” and well above the world average.
“China’s insatiable appetite for wood products is driven by its growing population, strong economic growth and growing export markets for the wood it produces,” John Chu, an analyst with Research Capital Canada, said.
But most believe that even more significant change is on its way. About 60 per cent of Chinese do not live in urban areas, but that is expected to fall to 40 per cent by 2030.
As 20 million people move to cities each year, residential construction will boom, and so, too, will demand for new furniture — the hundreds of millions of kitchen tables, chairs, beds and drawers implied by mass migration.
Peter Ruschmeier, a basic materials analyst with Barclays Capital, said that lumber futures had surged suddenly between October and November, though the cash price has yet to catch up.
Rising potential demand in China and historically lean inventories are driving the spike.
Some models suggest that the lumber price could trend towards a high more than 300 per cent above its 2009 low.
“While this is not our forecast,” Mr Ruschmeier said, “we believe it offers food for thought.”
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