Will contrarian theory prevail for lumber and panels in 2023?

Following the rollercoaster ride wood products prices have followed over the past two-plus years, an overwhelming majority of traders are predicting a bearish start to 2023.

Myriad reasons can be cited for expecting a sluggish start to sales of framing lumber and structural panels in 2023. Economic headwinds abound, including elevated mortgage interest rates, decades-high inflation rates, and a notable pullback in the rate of single-family housing starts.

In Random Lengths’ most recent monthly survey of retailers across the US, sales expectations for lumber and panels were rated the lowest since late 2018 (see chart below).

Prices of commodity wood products have been on a downhill slide for months, and some have eroded to levels not seen since Covid-19 lockdowns were implemented in North America in the spring of 2020.

Faced with an abundance of reasons to withhold purchasing, many buyers have run inventories to historically low levels. And bolstered by a cacophony of voices supporting their efforts to prepare for a bearish start to the year, most dealers and distributors have stayed out of the market for anything other than small, fill-in loads.

With that as a backdrop, a few traders are wondering if the contrarian theory will prevail. This theory follows the belief that if everyone is convinced a sure thing will take place, the opposite is likely to happen.

“I have said for years when everybody gets on the same side of a topic, it often goes the other way,” said a veteran oriented-strand board trader. “If everyone thinks prices are going to zero, it just might go the other way. It doesn’t take much to flip a market. If manufacturers think the market is going to be terrible in the first half and they take out a lot of production, it could go the other way.”

Production curtailments could be a key to determining the lumber and panel market’s course in early 2023. While a few cutbacks have been announced, it hasn’t represented enough volume to convince traders that the supply-demand balance will be flipped in the short term. If enough announcements are forthcoming, traders could reassess their expectations for the first half of 2023.

One veteran lumber wholesaler believes mortgage rates hold the key to the market’s course next year. With 30-year mortgage rates still holding above 6%, more than double where they were a year ago, affordability issues may be too much to overcome.

“Usually we have some big buyers come in at the end of the year, but I think we’re only going to see half of the normal volume,” he said. “I agree with the contrarian theory in general, but with mortgage rates where they are, I just don’t see it happening.”

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