August 16, 2021

Forest Products

Our view: Over the weekend, we reached out to several of our lumber trader and privately held producer contacts to gain a better sense of what may be next for lumber markets after the rapid correction to more historical ranges. Relative to our previous pulse checks (link), we sensed increased market fatigue, with both buyers and sellers being careful to not get caught offside. With new residential construction activity facing labor and material constraints, repair & remodel is increasingly viewed as the swing factor going forward. Traders see late September or early October as the likely turning point once homeowners return from summer holidays and slow spending on other leisure activities.

We think that lumber stocks (including West Fraser, Canfor, Interfor, Resolute FP, Western FP, and Conifex) are likely to remain under pressure until pricing begins to rise again. Overall, we see a positive setup for the traditional seasonal trade, where shares will typically bottom around mid-to-late October before rallying in anticipation of the upcoming building season. For more details on the seasonal trade, please click here.

No turnaround until after Labor Day; strengthening most likely in late September or early October – The consensus view among traders is that repair & remodel demand will need to improve in order for pricing to move higher. One trader noted that home center buyers at Home Depot, Lowe’s, and Menards have not been active in the market recently. With many potential remodelers spending on alternative activities over the summer (i.e., holidays, entertainment, and other social activities), the end of the summer is expected to result in improved demand.

Why has the correction been so large? Traders pointed to home centers, whose buyers had stocked up aggressively ahead of what was expected to be a repeat of the 2020 do-it-yourself (“DIY”) demand boom. With that never materializing, home centers have been in liquidation mode ever since. Traders also flagged homebuilders limiting sales of new homes and supply constraints on other building products as key issues. With prices declining so rapidly, lumberyards are working down their high-priced inventory before actively buying again, so that they can start with a clean slate; going forward, buyers and sellers are being careful to not get caught on the wrong side of another large move.

What we’ve learned from Q2 earnings so far – Overall, we found that distributors have kept their inventory levels very lean but remain positive on market conditions going forward:

• BlueLinx Holdings Inc. – Management noted that it is keeping inventory levels lean, which is resulting in lower volumes (-27% y/y QTD). In Q3, structural margins have been in the high single digits; however, management sees this declining through the remainder of Q3 as panel prices fall.
• Beacon Roofing Supply, Inc. – The company noted that demand remains solid, with total FQ4 sales growth expected to be in the mid-single-digit range.
• Boise Cascade Company – Management saw some improvements in repair & remodel demand, with professional contractor activity being stable while DIY buyers dropped out of the market to spend time and resources on other activities.
• Builders FirstSource Inc. – Management noted that homebuilders have been slowing activity due to labor and material constraints, but it expects much of the underlying demand to be pushed into 2022.

Upcoming events to watch – After market close today, Doman Building Materials Group reported Q2 results. Home Depot and Lowe’s will report on Tuesday and Wednesday this week, respectively. In particular, we are looking for further data points on how demand has been trending into late August.