Lumber pricgs poised to increase, bui climb mry be short-lived

BY Paul Jannke RISI

f UMBER prices typically see subLstantial movement in the first quarter- Unfortunately, the only movement we've seen this year has been down. Are we near a bottom? We think the answer is yes.

Lumber prices are well below our estimates of variable costs, as evidenced by the spate of closures and downtime that have been announced in recent months. Moreover, dealer stocks are now being measured in weeks, not months. Finally, lumber consumption has begun to increase seasonally as the spring building season gets underway.

So, lumber will become less available as mills cut production. At the same time, end-use consumption will rise (seasonally) while dealers lack the stocks on hand to supply the increased demand. This will be the impetus for a rally in lumber prices over the next several months.

While we expect"prices to move higher, the upside potential will be limited by several factors, the foremost being cyclically falling end-use consumption. Housing starts averaged just over 500,000 units (SAAR) in January-February. Meanwhile, construction on existing properties has fallen sharply in early 2009 as well.

The weak residential construction markets were likely influenced by unseasonably bad weather in the Midwest and Northeast (the regions that saw some of the greatest decline over this period). Nonetheless, high new and existing home inventories, tight credit markets, a collapse in cash out refinancing, and the worst recession in generations will all keep downward pressure on construction for the next several quarters.

Finally, industrial production has plunged. The manufacturing sector is likely to remain under pressure through mid-year as aggregate demand remains weak and companies continue to draw down inventories. Another factor limiting the upside for lumber prices are the very market forces that those higher prices will elicit: production will come back online as mills stop losing money and in some cases begin to turn a profit. We have seen several billion board feet of capacity curtailments over the past several months because prices were below the cost of production. With prices rising, mills will ramp up production to take advantage of one of the few times during the year where they may actually make some money.

So what is the bottom line? We expect prices will increase 25Vo from their first quarter lows to their peak midway through the third quarter. In addition to being mild, this rally will be short-lived: as the building season winds down toward the end of the year, we expect lumber prices to again move lower. However, they will not retest the first quarter lows as dealers will not have as much inventory to draw down this year as they had in 2008, and so ordering will be steadier. Moreover, we expect the overall economy, consumer confidence, and housing markets to be improving by the end of the year. This will lead dealers to build more inventory than they did in late 2008/early 2009.

- Paul Jannke is senior vp. ofwood & timber information for RISI, a leading information provider for the global forest products industry and publisher o/Crow's Market & Price Service, which offers free trial subscriptions at www.risiinfo.com/ crows. Reach Mr. Jannke at pjannke@ risiinfo.com.

Crow's Framing Lumber Composite Index

($ per MMBF)

A FTER more than 63 years of .Cl,business, Homer "Bud" McCrary, 82, and Frank "Lud" McCrary, 80, have decided to slow down just a little. The two co-founded Big Creek Lumber, Davenport, Ca., with their father and uncle after returning from World War II and have worked there ever since.

The next generation moved into place April l. Lud's daughter, Janet McCrary Webb,48, took over for her dad as president. Her sister, Ellen McCrary Rinde, 52, and Bud's son, Ken McCrary, 57, assumed Bud's role as co-vice presidents.

Both Bud and Lud said they like their jobs too much to totally retire. "We'll be around. We like what we're doing," said Lud, who will cut his schedule at the sawmill from five days to four, to spend more time on his cattle ranch and in his garden.

Bud is looking forward to learning more about his new camera and his first personal computer, and working on other mechanical projects. The load-building machine he designed for Big Creek can carry up to five tons and uses less fuel than a forklift. It was constructed in the company's truck shop in Davenport to comply with California's new clean air regulations.

Back in 1946,the company started with $7,500 in cash and war bonds, which the partners used to purchase surplus military equipment that they modified to meet their needs. Today, Big Creek owns timberland and manages timber for private landowners, harvests timber and operates a sawmill, wholesales the lumber it produces, and runs five retail yards.

Bud and Lud are also passing on a legacy of environmental stewardship.

Big Creek was one of the first logging companies to selectively fell trees instead of clear-cutting the forest. The company also operates the first redwood mill certified by the Forest Stewardship Council. "All of the red- wood that we harvest and mill comes from the Santa Cruz Mountains," said Janet.

She began working at Big Creek in high school, when she earned science and physical education credits by working with the company's foresters. Later, she earned a degree in forestry at Humboldt State University and joined Big Creek's lorestry department ful l-time.

After a few years, Janet moved to sawmill lumber sales, eventually becoming manager of the sawmill/ wholesale division. "Back 20 years or so ago, there weren't very many women in the lumber business," she said. "It took a sense of humor, coupled with humility and ability, in order to succeed."

Both Ellen and Ken have also worked at Big Creek since graduating from college. Ellen started at one of Big Creek's retail yards, then completed extra training to become personnel and risk manaser. "Our com- pany currently has about 200 employees in some pretty high-risk occupations that require a rigorous safety program, so this is a very critical function for us," said Janet.

Ken has been in charge of the company's information and communication system for years. "Ken's department maintains a wide array of computer equipment and software," said Janet, "as well as our phone systems throughout the company."

The housing slowdown hasn't affected Big Creek as much as other California mills because redwood is used more for decks and fences than new houses. Even so, the company had to lay off 2OVo of its workforce last year. "It isn't handing her any real piece of cake, with the economy the way it is," said Lud of his daughter's promotion.

"Good communication is going to be essential for any transition in leadership to be successful," said Janet. "We are fortunate that we get along well as a family, but we also make a conscious effort to do so. In a family business, as in any other type of relationship, it is critical [o treat each other with respect, to appreciate each other's contributions, and to pull your share of the load." i II-l)t:liS r'()nliIu. lo intor'po|rLlc ill\ itin! orrttl0or \l)llr'f\ il\ it \\ll\ [() illllit!l lt()ll]CbLl\et\ lll tr ClLtlle lt:itt': ntlLlkt'1. [)r. krn.r iltrl IiLll\l\r'itl)crl lrlelr. r'ltltiutcc lr lrrrilrlrr''. ollt'tirtl' irr llrr ntitrrls ol ll()tclltiitl ltonte htrrar'\. ll\ ln,lll\ ()l lltent eon:irlel cttltltrltctl otrltlool \l)lrr'e\ illt r'\tell\i()ll ()l lh('il lir itt! rplt.g t'::g111i ,llr .'rp.t1,li1l tlte \LlLllla lootllLc ol llrt' ltrrntc.

She also credits Big Creek's "talented managers, supervisors, and employees, whose expertise will help guide us in making decisions and changes. We are still leaming and will face many challenges as time goes by. The main thing is to plan and train as well as possible."

As for the next generation, she said that several younger members of the family have expressed interest but "it's still a bit early to determine how serious they are about it since some of them are still in high school or have just recently started college. Finding the best approach to including the next generation in the family business is currently a priority issue that we are workins on."

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Ior t'tlrntIlr'. ncrr or'.Ltrni! Lerlll L()ntl)()\it- rlc..kirt:t is ll()\\ it\ lrilrrblt tllrt i\ r'()ln|()\!'rl ()l ll!'i.ll t\\ ttOcl ertitrr l ilter: ItLrttt tlistlrttlcLl r'r'tltrr lr-rc: *]rielt ri()ui(l ()that\\ i\t' l)c lrrrlnctl lrrrrl lrlrltlttl tr illt rcLr.l.'ti ltolrctlrr lene Illrslie lJc.ltrrr.' il ir ntlLtle ()l nilluliLl r'c(liu. llte eontPrrsite rlct.kirtr does not need or contain mildewcides, insecticides or col_ oring agents. Customers concerned about the environment can feel good about using composite decking products that make good use of natural resources and recycled material.

Bending the Rules

Applications in which composite decking boards are curved to fit certain design requirements are also gaining in popularity. Composite decking boards can be heated and then bent for use in such applications as curved stairs, yard structures that highlight architectural elements such as trel_ lis and walkway arches, and any surface or non-structural applications that call for round edses.

Builders can also combine attiactive desisn and f'unction with curved benches in complementary iolors, either stand-alone or built-in to decks. Curved and ansled com_ posite boards are also increasingly used in hol tub surrounds and on pool decks. Composite decking is a good way to combine the look of wood with long-lasting quality for modern projects that demand resilient surfaces.

Dealers who provide attractive composite decking prod_ ucts have an advantage in gaining and retaining cusromers by offering materials that are versatile, durable, and envi_ ronmentally friendly. Customers benefit from using a decking material that offers design flexibility, enginee-red strength, and efficient use of recycled materials.

Brent Gwatney is vice president rf sales & marketing for MoistureShield. Reach him via www.moistureshield.com.