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European Wood Market
Lumber is sensitive to the general interest rate environment. Mortgage interest rates are the deciding factor for building new homes. Lumber tends to perform ahead of other markets because it is a barometer of interest rates and also a leading indicator of general economic development.
Wood prices continue to fall. In Germany and on the world market. In North America, prices fell sharply again after an interim high in July. Prices fell by around 15%. The reason: the housing and construction crisis - and the high interest rates.
Wood prices are falling on the global market due to the renewed weakening of demand, report analysts at trading.economics. After wood prices moved towards USD 600 per 1,000 board feet in July, wood prices fell back to just under USD 500 per 1,000 board feet in September. That's a decrease of around 15%.
Recent data showed a decline in U.S. softwood lumber imports from Europe, which totaled 428 million board feed (mmbf) in the second quarter. The figure is a 30% decline from the record volume of 610 mmbf in the first quarter and a 12% lag from the total in the same period last year, analysts say, citing weak demand in the US market.
European exports to the US are expected to continue their downward trend in the third quarter and fall short of last year's record levels due to increased interest rates and declining production in Europe. Additionally, North American exports continued to show significant weakness due to weak demand in most major markets.
Analysts at Trading Economics expect timber prices of just USD 477/1000 board feet by the end of this quarter. In 12 months, just under USD 415 is expected.
Wood prices are falling due to interest rates and the construction crisis
Timber market analyst Andrew Hecht on Barchart cites another reason for the price slide: ¡°Lumber is sensitive to the general interest rate environment,¡± he says. And: ¡°Mortgage interest rates are the decisive factor for the construction of new houses.¡± Many homeowners in the U.S. have refinanced their mortgage debt at interest rates below 3% in recent years.
A conventional fixed-rate mortgage with a term of 30 years was above the 7 percent mark in mid-August 2023. According to Hecht's calculations, the monthly payment for a conventional mortgage of $400,000 has increased by more than $1,300.
At the same time, real estate prices in the USA have not fallen due to low new construction activity. The result: While the current environment supports those selling an existing home with significant equity, the market for new home construction is weak, weighing on lumber demand.
Although the wildfires in Canada have recently supported lumber prices, mortgage interest rates of over 7% are putting considerable pressure on lumber prices.
Leading indicator for economy and market development
According to Andrew Hecht, there is another point about the wood market that is important for assessing the situation: ¡°Wood tends to develop ahead of other markets because it is an interest rate barometer¡± and also a leading indicator of general economic development .
The dramatic price rallies from 2020 to 2022 signaled the highest inflation in decades, and the sharp corrections then signaled the US Federal Reserve's (Fed) monetary policy stance.
According to this assessment, the dramatic price movements for lumber in recent years were a signal of economic and interest rate changes. Wood prices also tend to reflect seasonality.
In typical years, the amount of wood reaches seasonal lows as the winter season approaches. However, according to Hecht, 2023 is not a typical year with an aggressive interest rate policy. Markets reflect economics and politics, and wood is a good barometer of sentiment because of its penchant for extreme price volatility, says Hecht.