Building Materials Skyrocket; How Much Higher Can Lumber, Copper, Iron Ore Go?

 | May 11, 2021 05:04

First it was lumber. Then copper. Now, it’s iron ore.

Price pressures in building materials are just skyrocketing in the United States as an economy rip-roaring in its recovery from COVID-19 sets up an inflationary environment possibly not even seen after the Great Recession of the last decade.

The US economy expanded at an annual rate of 6.4% in the first quarter of this year, after the pandemic-induced contraction of 3.5% for 2020. The Federal Reserve projects that growth through 2021 will be 6.5%. 

The trouble is inflation. No one really knows what it’s going to be.

Officially, the Fed’s Federal Open Market Committee (FOMC), has forecast that the Personal Consumption Expenditures rate, a measure of inflation, will average 2.4% in 2021 and 2.1% in 2023.

Privately, most monetary policymakers at the Fed, led by Chairman Jerome Powell, are convinced that 2021 will not have the distinction of being a 2% inflation year.

Since the Fed announced its 2% target in 2012 for price pressures, the central bank has never achieved the goal for a calendar year. In fact, prior to the 2008/09 financial crisis, there were only four years when US inflation exceeded this target, from 2004 through 2007.

Powell particularly likes to think that the current inflationary pressures are fleeting, or, to use his favorite word, “transient.” The Fed chair believes that until 2023, there will not be any lasting inflation that will allow the metric to reach 2% for a calendar year.  A good number of district Fed chiefs, who sit with Powell on the FOMC to decide on monthly interest rates, agree with their chairman. 

The problem is with economists outside the central bank, specifically those who have the ears of Wall Street traders. 

This constituency is almost certain that US inflation will be beyond anything projected as the economy makes what will be closest to a full recovery from the pandemic. 

But even this group doesn’t believe it will average 2% this year. They are, however, convinced that price pressures will force the Fed to increase interest rates—which have been near zero since the COVID outbreak in March 2020—earlier than it expects and taper the accomodative monetary policy that has juiced stock markets almost throughout the pandemic. 

Given their bets on price pressures, and the beauty of self-fulfilling prophecies—i.e. in order for inflation, the record highs in commodities must continue—let’s examine the three aforementioned building materials and see how much higher they can go, at least from a technical viewpoint.

Lumber: $2,000 Record High Projection/h2

Lumber is wood turned into beams and planks and an essential raw material in home building.

A US lumber shortage has caused prices to more than triple within the last year and added thousands of dollars to the overall cost of new home construction in the country.

In just one year, the price of lumber has increased about 370%—reaching a record high above $1,700 per 1,000 bd ft. For context, lumber has historically fluctuated between $200 to $400.

Across the United States, the average price for a single home shot up by $35,872, according to an analysis conducted last week by the National Association of Home Builders.

In a recent survey in Nevada published by the Las Vegas Review-Journal, new, single-family homes, on average, can cost $25,000 more, and for larger homes, the lumber shortage could cost upward of $50,000 to $60,000 more. 

Nat Hodgson, CEO of the Southern (NYSE:SO) Nevada Home Builders Association, was quoted saying about the survey:

“It’s an increase of that much of the same wood that you used 12 months ago for the house next door.”

Pricier wood impacted the cost of cabinets, doors and flooring he said.

“I’ve been in this industry since ’93, right here in this town, and this talk about lumber—I have never seen something so large increase so much,” Hodgson said. “I’d love to tell you it’s going to be over in a week or two, but it’s not unfortunately. It’s pricing the heck out of people to not be able to afford to buy a house.”

Lumber costs started creeping up last year, though in recent months, they have reached a crescendo.

The price per thousand board feet of lumber normally costs between $200 and $350.

According to the latest analysis by Random Lengths, the industry’s tracking firm, the prices as of the week ending Apr. 23, show the cost of framing lumber near $1,200 per thousand board feet—up nearly 250% since April 2020.

About five weeks ago, prices for lumber dropped about 15% but quickly jumped back later, said Hodgson. Lumber is typically used in framing a new home.

“It’s up to $1,300 as of today,” said Hodgson. “That’s insane. In history, it’s never been like that. If it was a small line item in a house, it would be OK if it’s going to increase your house cost by 1%. But no, lumber is one of the largest line items in the house budget.”

Most of this cost can be passed down to the consumer, but extremely tight supplies mean homebuilders are unable to start more projects.

Analysts are now warning that lumber prices could reach a flashpoint, where affordability becomes so limited that demand suddenly falls off. This has led the National Association of Home Builders to ask the Biden administration for a temporary pause on Canadian lumber tariffs, which currently sit at 9%.

US tariffs on Canadian lumber were first introduced in 1982, and represent one of the longest lasting trade wars between the two nations. The US is currently appealing a World Trade Organization (WTO) ruling that states its 2017 tariff hike was a breach of global trading rules.

As of Friday, July lumber futures listed on the Chicago Mercantile Exchange reached an all-time high of $1,711.20 per thousand board feet.