Southern Pine Markets After the Design Value Changes.
BY: Paul F. Jannke
In November 2011, FEA released a report “What if the Proposed New Design Values for Southern Pine are Approved?” In the report, FEA detailed the potential demand loss for visually graded southern pine lumber. We also pointed out that wider dimension lumber was particularly vulnerable and that we might actually see demand for smaller dimension lumber increase as “…the higher cost of alternatives will lead some end-users (e.g. truss manufacturers) to alter designs to incorporate more visually graded southern pine instead of substituting other products.” We went on to forecast that this would cause prices to slip 5-10%.
The new design values were implemented nine months ago. What has happened since? Some of the things we thought would happen have indeed come to pass. There have been some unforeseen consequences as well. The graph below shows the spread between southern pine eastside #2 & Btr 2×4 and 2×10 prices. The ratio of wide dimension to narrow dimension prices is near an alltime low.
Some have attributed the decline in this spread to the relative strength of multifamily versus single-family housing starts. However, this is likely not the case. If it were, then wide-dimension lumber would be discounted everywhere, but it’s not. SPF, Hem-Fir, and Douglas-fir 2×10 prices are not showing weakness; only southern pine has declined. Moreover, the other species 2×10 prices show weakness relative to narrows.
Some have said it might be a glut of large logs with wet weather in the South. However, this is not the case because wet weather in the South would have made bottomland logging difficult, forcing harvesting to dry sites and smaller timber.
It also can’t be due to fire-code changes. Fire-code changes should bolster solid sawn lumber demand and prices. In any case, they have not yet been widely adopted, so have yet to affect the markets.
This leaves the June, 2013 reduction in design values—and the loss of two feet in maximum allowable span for #2 2×10—as the most likely remaining reason #2 wide-dimension southern pine demand and prices are lagging behind narrow dimension demand and prices.
There have been other, unanticipated consequences of the southern pine design value changes. We attribute these to builders trying to regain the two feet of maximum allowable span they lost in the #2 2×10.
The first change we have seen is the increase in the spread between #1 and #2 2×10 prices. Note, we use westside prices to compare #1 and #2 2×10 as Random Lengths does not publish an eastside #1 2×10 price. The second change is the increase in #2 2×12 prices relative to #2 2×10.
While both #1 2×10 and #2 2×12 southern pine prices have increased relative to visually graded #2 2×10, the relative 2×12 price has increased more. This is likely due to a greater elasticity of supply for #1 2×10: for a relatively small premium, a mill can sort out more #1 2×10, but it is more difficult to increase the supply of 2×12 as this requires larger logs.
While these strategies will work when housing starts are near 1.0 million units, they will become less viable as housing starts approach and then exceed underlying demand levels (1.5-1.6 million units).
Once this happens, builders will have to turn to alternative sources for floor joists, roof rafters, beams and headers. When that happens, we expect engineered lumber (I-Joist, LVL and glulam in particular) to reap the benefits.
In fact, builders have already begun to turn to engineered lumber. Usage rates across products and end-use markets are up 1.0-1.5% year-over-year in the first quarter of 2014. Meanwhile, prices are up 5-10%. While not all of this growth can be attributed to the change in design values, a portion of it is.
This trend will only accelerate over the forecast as housing starts move back towards “normal” levels. FEA forecasts total North American I-Joist and LVL demand will increase 10-15% per year over the next five years, while prices will be up nearly 5-10% per year. Improving residential construction markets will drive most of this growth, but some gains will be made at the expense of visually graded southern pine lumber.
Visually graded southern pine design values changed almost a year ago, reducing the maximum allowable span of a visually graded #2 2×10 by two feet. Since then, builders have gone up a grade or a size to regain the 2 feet of maximum allowable span they lost in the #2 2×10. Between June 2013 and February 2014, eastside southern pine #2 2×10 prices declined 8% while 2×4 prices increased 12% and 2×12 prices jumped 19%. Meanwhile, #1 2×10 prices (westside) increased 9%.
These price changes are a direct result of the design value changes: endusers are substituting #1 2×10 and 2×12 for #2 2×10 as well as adding more 2×4 to trusses to gain longer spans. We expect this trend to continue over the next several years.