- The price of lumber slipped to a 13-month low on Wednesday.
- The commodity still has potential downside of 28% through the end of 2021, said Naeem Aslam of AvaTrade.
- Aslam cited two reasons for his outlook: Fed tightening monetary policy and China releasing its stockpiles.
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The price of lumber slipped to a 13-month low on Wednesday and the commodity could see a further slide of 28% by the year-end, according to Naeem Aslam, chief market analyst at AvaTrade, an online broker.
Aslam said he sees lumber trading as low as $330 per thousand board feet by the end of 2021 or in the first quarter of next year, reflecting the 28% downside from current levels.
“Now is definitely not the time to fish that bottom,” Aslam told Insider. “There is a huge correction ahead … Prices will continue to fall from here.”
He gave two reasons for his outlook.
First, when the Federal Reserve starts to tighten its monetary policy, the housing market, he said, will cool as rates rise. Speculation that the central bank will taper assets sooner than expected has been rising amid a robust economic rebound this year.
“The housing sector has built up a massive backlog,” he told Insider. “How that backlog was built was because of extra cash which was injected.”
Aslam was referring to the three rounds of stimulus checks millions of Americans received in the wake of the pandemic. But now that a fourth stimulus check is unlikely given the accelerating pace of the recovery, demand, he said, will abate.
“The reality is that helicopter money really pumped up the massive demand in terms of material,” he said.
Aslam also noted the shortage of affordable homes for sale in the US has persisted for years.
Second, when China accelerates the pace at which it releases inventory from its strategic reserves, there will be an oversupply in the commodities market, which will push prices, including the price of lumber, down.
The Asian superpower has been trying to cool surging prices – including oil, coal, and metals – by releasing stockpiles as the world’s second-biggest economy looks to bring manufacturing costs down amid rising inflation.
“We see China cracking down massively,” he told Insider. “That is going to bring the prices lower for these sorts of assets.”
Lumber futures as of August 18 were hovering around $458 per thousand board feet – 73% lower than the record high of $1,711 achieved in May. In July last year, it was trading at $438 per thousand board feet.
Lumber prices skyrocketed more than 500% in the 15 months after the COVID-19 outbreak as supply-chain disruptions collided with a demand for housing and activity from homebuilders.