Producer Prices in September – Wood Products and Gypsum, Different Markets or Different Planets?

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for September. Producer prices for finished goods declined by 0.1% in September from August. Increases in core prices (excluding food and energy) of 0.1% and energy prices of 0.5% were offset by a 1.0% decline in food prices, pushing the overall index down.

Core producer prices have been relatively stable as the economic recovery has proceeded, hovering around an average of 0.14% per month while the top line figure has largely followed energy prices and to a lesser extent food prices.

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Building materials prices have been responding to the progress of the housing recovery. Early improvements in the housing market put upward pressure on materials prices, particularly wood products and gypsum. As the housing recovery has gained momentum some price relief has come from the re-opening of capacity idled during the housing bust.

After more than doubling from 2011 levels (when prices were depressed from three years of greatly reduced housing demand) OSB prices peaked in March 2013 and have declined significantly since. As of September, OSB prices have declined to 32% above 2011 levels. These price declines can be attributed to increases in productive capacity, with several major producers adding capacity since late 2012.

Softwood lumber prices also rose sharply in 2012. Softwood lumber price increases were more moderate than OSB but still reached 38% above 2011 levels. These prices have also declined owing to increased capacity in the industry. After peaking in April prices fell sharply through July. Prices rose in August and September but currently stand at 20% above 2011 levels.

Going forward price volatility for softwood lumber will be exacerbated by volatility in Chinese demand, competitive pressures associated with the thresholds of the US/Canadian softwood lumber agreement, and vulnerability to supply chain disruptions related to infrastructure issues, ranging from transportation bottlenecks (truck shortages) to mill fires.

Gypsum prices stand out as the exception to the rule that a recovering housing market will bring productive capacity back to the market place and with it lower prices. National Gypsum has announced a 20% increase in prices effective January 1, 2014. This announcement repeats the pattern of similar industry announcements of price increases for 2012 and 2013.

Gypsum prices are currently 33% above 2011 levels and 93% of housing boom peak levels based on two sharp steps up in the beginnings of 2012 and 2013. There have been no significant gypsum price declines as the rest of the housing sector has moved steadily back toward more normal levels of production. The announced 20% increase will bring prices to 60% above 2011 levels and 111% of housing boom peak levels.

This annual step-up pattern of price increases is in stark contrast to the steady increases in wood products prices as the housing recovery gained steam, which have been followed by declines associated with additional productive capacity and wood products supply.

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