The following is an excerpt from the Scotia Bank's Commodity Price Index dated January 31, 2012. The complete report can be downloaded here.
The Forest Products Index gained ground in December, rising 0.7% m/m. Stronger lumber and OSB prices more than offset a further drop in NBSK pulp prices to US$890 per tonne and a slight decline in SC-A paper prices. Western Spruce-Pine Fir 2x4 lumber prices climbed from only US$230 to US$248 per mfbm in December, ending the year at a profitable US$261 — buoyed by a slight improvement in fourth-quarter U.S. housing starts to 657,000 units annualized, holiday mill curtailments and expectations of a pick-up in Chinese buying in early 2012, now occurring. (B.C. producers report that they are now selling higher-grade lumber to China — a new ‘C’ grade between a high-end No.3 and a low-end No.2.) However, mill prices remain below the US$285 of late 2010, at a time of rapidly expanding sales to China and a surge of optimism over a possible recovery in U.S. housing. B.C. lumber mills expect steady sales to China in 2012.
U.S. housing starts did edge up in 2011 to 607,000 units and should inch ahead again in 2012 to 680,000, though a large overhang of foreclosures is slowing the improvement. In view of Fed concern over a still weak U.S. housing market, it would not be surprising if the Fed were to announce an ‘asset purchase program’ or QE3 to include mortgage-backed securities later in 2012, to boost liquidity. The Administration might also unveil a mortgage-refinance program, which in my view might be more effective in boosting the housing market, as interest rates are already low and not a constraint. The Softwood Lumber Agreement between Canada and the United States has been extended for two years through October 2015.