Lumber prices have fallen, but the stage is set for a potential 65% rally through the end of the year, an expert says
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- Lumber may have tumbled from its pandemic peak but the stage is set potentially for a 65% rally by the end of 2021.
- Three factors are behind the outlook: Biden's infrastructure deal, demand for homes, and seasonal trends.
- "The losses we are seeing over recent months could soon enough bring another major buying opportunity for the bulls," Joshua Mahony of IG said.
The price of lumber may have plummeted from its pandemic peak, but the pieces are in place for a rally of up to 65% by the end of 2021, according to an analyst.
Lumber futures as of July 30 were hovering around $603 per thousand board feet - 64% lower than the record high of $1,711 achieved in May. A year ago, the commodity was trading at roughly $448 per thousand board feet.
But with the $1.2 trillion bipartisan infrastructure deal moving through Congress, a continued rise of housing prices thanks to near-zero interest rates, and seasonal historic trends, there is a good chance lumber prices will rise again, to as high as $1,000 per thousand board feet, according to Joshua Mahony, senior market analyst at trading platform IG.
The bulk of the infrastructure deal would go into building roads and bridges, which would undoubtedly spur the demand for building materials, lumber included. On top of this, many Americans continue to build new houses or renovate existing homes.
The senior analyst also pointed to seasonal factors behind his outlook.
The last quarter of the year typically provides a "buoyant" period for lumber, Mahony said. Nine out of the 12 fourth-quarter periods ended in the green for the commodity, with the three quarters when lumber slipped notching minimal losses of less than 5%.
"There is good reasoning behind the idea that the losses we are seeing over recent months could soon enough bring another major buying opportunity for the bulls to come back into dominance," he said.
The fact that gains were wiped out in the first half of the year is also "not abnormal," according to Mahony.
"That reversal historically results in a bullish reversal to regain lost ground and bring us back into a positive end to the year," Mahony said. "This current pullback is in fact part of a seasonal trend that typically resolves in a dramatic recovery towards the end of the year."
Lumber prices at the start of the year surged, triggered by factors including concerns about an overheating housing market and millennials reaching home-buying age. Demand has since cooled as consumers absorbed the sky-high prices and as the economy reopened.
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