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Is the 25% lumber rally just the beginning of the next bull market?

Lumber prices start to recover as we approach key Friday deadline for US freight negotiations. Should they fail, nationwide strikes could help bring a renewed bottom as supply grinds to a halt.

Lumber price stem recent bearish trend

Lumber has enjoyed a welcome respite from the incessant selling pressure that has dominated the past eight months. From the January peak of $1342, we have seen the price steadily tumble into the critical $460 support level reached at the beginning of this month. That represents a 65% decrease in price, bringing respite from the highly elevated prices driven by transport bottlenecks and a surge in building projects throughout Covid-19.

Things are very different some two years later, with many of the world’s biggest economies facing higher borrowing costs and negative growth. Housebuilders have been warning of potential difficulties as we head into a tight period where the central banks raise rates in a bid to drive down inflation. However, the gains seen over the course of the past week do raise some hope that we could be due a period of upside as the price turns higher from a historically critical support level.

US rail strikes could hamper supply

A long-fought battle over pay and employment conditions for US freight workers has come to a head recently, with inflation pressures raising the chance of a strike amongst the 150,000 member-strong labour unions. With negotiations reaching an impasse, there is a strong chance that we see a strike that hits the US economy to the tune of $2 billion a day according to a recent Association of American Railroads (AAR) report.

A cooling off period ends on Friday 16 September, with many speculating that this could bring strikes or employee lockouts by the railroad corporations. While Congress could extend the cooling off period to continue negotiations, this inability to resolve the current standoff does raise the risk that employees walk out on the industry, leaving gaps that are difficult to fill.

For lumber, the reliance on freight railroads for transportation around the US is critical, with a given year moving approximately 420,000 carloads of processed timber and wood products. That potential disruption does bring uncertainty over the demand-supply dynamic, with constraints on deliveries bringing a greater willingness to pay higher prices.

$460 the key line in the sand

Looking at lumber prices from a historical perspective, we can see that the past decade has been dominated by an environment of rising prices. That took on a new trajectory once Covid-19 took hold, with the prices reaching a peak of $1,711 (per 1000 board feet). However, we have recently seen the price fall back to the key $460 support level, which underpinned the price throughout the entirety of this two-year period. Thus far we are seeing the price turn higher, raising the likelihood of another rebound in the price going forward.

From a daily perspective, we can see how the price has jumped into the confluence of Fibonacci and trendline resistance, with the price turning lower yesterday. The events around Friday’s end to the cooling off period for railroad negotiations could bring major volatility, but the key break we need to see is either a move up through $634 (bullish), or below $460 (bearish). Until then, this crucial resistance zone should be watched closely as a potential area that the bears could come back into play. If they fail to reassert control, we could soon see another $460 bottom develop as supply constraints drive the prices higher.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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