By SIMON CONSTABLE
Futures prices for lumber have been riding a wave churned by hurricane Sandy. Quotes for plywood have surged 15%, to $340 per thousand board feet, since the beginning of October, propelled by the prospect of rebuilding in the northeastern U.S. after Sandy's onslaught.
Investors thinking about jumping on lumber for the short term will likely get wiped out. But those willing to hang in for the long haul could enjoy a sweet ride.
"Widely advertised natural disasters tend to be tops in lumber, fairly consistently," says Shawn Hackett, author of the Hackett Money Flow Report. But the hurricane's impact on lumber prices is expected to fade quickly. "People who are knowledgeable about this industry are using this spike as a selling opportunity," Hackett reports.
Since mid-October, the period immediately before the hurricane, the net short position of industry insiders such as lumber merchants and producers swelled 68%, according to data from the Commodity Futures Trading Commission.
CME Group lumber futures closed up 7% for the week, at $340.10 per thousand board feet.
IF QUICK GAINS ARE UNLIKELY, larger profits await those willing to hold on for a couple of years, spurred by three factors cited by market participants.
First, the U.S. housing market is poised for a considerable rebound. Housing starts are forecast to reach 1.15 million in 2014, up from an estimated 730,000 this year, according to Daryl Swetlishoff, forestry analyst at Raymond James. That alone equates to a 19% surge in North American lumber demand from 2012, to 56 billion board feet in 2014, he estimates.
Second, demand from Asia is strong and likely to remain so. Exports of softwood lumber from British Columbia to China are expected to run some 4.5 billion board feet in 2012, up from less than half a billion in 2007, according to Raymond James projections. To put that figure in perspective, Swetlishoff forecasts that total exports from North America to the whole world will equal 8.3 billion board feet this year.
Third, a supply shortage is on the way. Pine beetles are destroying the forests of British Columbia.
"Approximately 57% of the pine volume in the province will be killed by 2017," according to a report from the province's forest service. Given that it takes a decade for pine to reach maturity, that's a problem that could leave a deficit for a long time.
In short, higher demand and curtailed supplies mean the prices of plywood will eventually soar north of $500 per thousand board feet, according to Hackett.
Long-term investors might want to look at stocks rather than futures. Raymond James rates Rayonier
(ticker: RYN), a timber real-estate investment trust, a Strong Buy. The firm also rates Canfor (CFP.Canada), a building-materials producer, Outperform. S&P Capital IQ classifies Louisiana-Pacific (LP), a building-materials company, a Buy.