Pros Are Watching This Commodity Closely… You Should Too!
No doubt about it, Hurricane Sandy dealt a devastating blow. The massive storm caused an estimated $10-20 billion in property damages on the US east coast. And when lost economic activity is added to the mix, damages will likely rise to around $50 billion.
Of course, the human toll is the hardest to get a grip on…
Nobody likes to see people suffering the way they are in areas of New Jersey and New York right now. I can only hope that those affected can get their lives back on track soon.
But as troubling as it is to see all the despair caused by this horrific event, there’s actually a silver lining to the destruction left in Sandy’s wake.
First of all, the rebuilding efforts will likely put thousands of unemployed construction workers back on the job. What’s more, a retail and construction spending surge will ensue in coming months as policyholders receive insurance payouts on their homes.
I know it may sound a bit insensitive to say at a time like this, but last week’s storm is good news for the battered region’s economy.
And that’s not all…
Dig a little deeper and you’ll find there are even more ripple effects from Sandy’s historic upheaval.
Case in point, the once sleepy timber market is waking up to the fact that an enormous amount of lumber will go into the rebuilding efforts. In fact, March 2013 lumber futures surged to $335 per thousand board feet (mbf) in recent trading. That’s up 14% from the early October lows of $295 mbf.
What’s more, it’s the highest prices since March 2011. As you may know, that’s when the Japanese earthquake and tsunami sent lumber prices soaring.
But unlike 2011, lumber will likely hold onto recent gains this time around. As a matter of fact, many commodity analysts see prices moving even higher in coming months.
Why?
Let me explain…
The US housing crash sent lumber prices into the toilet back in 2008. As a result, countless lumber mills shuttered their operations. And to this day, many of those mills are still closed. There simply hasn’t been enough demand from the home building industry to warrant firing up the saw blades again.
As a result, timber inventories are relatively low.
But listen to this…
By the looks of recent data, the US home building industry is starting to show some real signs of life. As a matter of fact, government data shows single family home starts rose to a seasonally adjusted annual rate of 872,000 in September 2012. That’s 15% above the August 2012 estimate and 34% above the same period last year.
What’s more, building permits rose to 894,000 in September… 45% above the same period in 2011.
Mix low inventories with firming housing data and a sudden increase in lumber demand from Hurricane Sandy, and you have the makings of a substantial undersupply situation.
And keep in mind, shuttered lumber mills don’t just turn on with the flip of a switch. Time and plenty of capital is needed to get these operations back on their feet. So it’s unlikely the swelling demand for building materials will be immediately filled without timber prices jumping higher.
Speaking of prices jumping higher…
Many commodity analysts suggest lumber may trade to $400 mbf in coming months… 20% above current prices.
How can you capitalize on a looming lumber rally?
Unfortunately, there aren’t any commodity based ETFs that track the price of timber.
However, the iShares S&P Global Timber & Forestry ETF (WOOD) holds a number of industry leading timber companies including Weyerhaeuser (WY), Rayonier (RYN), and Plum Creek Timber (PCL).
If timber prices rise like I think they will in coming months, WOOD will likely see additional gains as well. Take a look at it for your portfolio today!
Until Next Time,
Justin Bennett
Category: Commodities
