Lumber prices rally amid increased construction spending

By: Faith Maina
Faith Maina
Faith strives to break down complex developments so investors can make better informed decisions. When Faith is not immersed… read more.
on Dec 3, 2020
  • Construction spending in the U.S. rose by 1.3% compared to the expected 0.8% in October.
  • Investors are banking on reconstruction projects after the official ending of the Atlantic hurricane season.
  • Record-low interest rates and a weakening U.S. dollar have catalysed lumber prices' upward trend.

Lumber prices are at the highest level since September 2020. After ending October at a dip, the Random Length Lumber Futures are up by about 23,44% to trade at $649. A weakening U.S. dollar and heightened construction activities have catalysed the rally.

lumber prices

Construction spending in the U.S. soars

On 1st December, the U.S. Department of Commerce indicated that construction spending in the country had risen by 1.3% in October. Analysts had forecasted an increase of 0.8%. The gains followed September’s downward correction to a decline of 0.5%.

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The construction of single-family homes largely contributed to October’s gains. For months now, the shortage of new single-family homes has pushed constructors to heighten such projects. Subsequently, the construction of these houses soared by 5.6% in October. It was one of the factors that facilitated the 2.9% rise in residential private constructions.  

COVID-19 has resulted in increased migration to U.S. suburbs. Besides, the Federal Reserve maintained the record-low interest rates of between 0% and 0.25%. The low interest rates have enhanced credit affordability; an aspect that has increased the demand for residential houses hence the rise in lumber prices.  

Weakening-dollar environment favours lumber prices  

For anyone looking to invest in commodities, a weakening U.S. dollar is a bullish sign. The value of the greenback has an inverse relationship with the prices of different commodities. The U.S. dollar index (DXY) is trading at $90.97, which is its lowest level since April 2018. This weak-dollar environment has supported the rallying of lumber prices.

Analysts have forecasted that the downward trend will continue into 2021. While speaking on Bloomberg Markets, JPMorgan’s lead portfolio manager Julio Callegari said, “we still are biased for a weakening dollar, particularly as we move into 2021. Basically, we think that we have the key elements for some dollar weakness.”

U.S. weather favours construction activities

The lumber market is further reacting to news that the severe Atlantic hurricane season has officially ended. Out of the 30 recorded storms, 12 hit the U.S. shores. The number is higher than the record of 9 set in 1916. The season also included 13 hurricanes. Laura was the harshest hurricane. The hurricane left damage worth about $14 billion.

Now that the hurricane season is officially over, reconstruction activities are set to begin. As a result, there will be a high demand for lumber; a factor that will push its prices higher.

At the same time, most of the states in central and eastern U.S. have recorded warm weather since August. With the high temperatures continuing in November, builders have been active throughout the season. The continuous activities at construction sites have offered support to lumber prices.  

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