Lumber prices gained more than 50 percent in 2012, which makes it the best performing commodity for the year. That might be rather surprising for many investors, as lumber has been quietly moving higher through the year and accelerated higher in the last couple months.
The housing recovery in the U.S. has been very modest, but it has nonetheless bottomed and started moving higher. New housing construction has ticked higher, but it is still well below the levels of the housing boom. You might ask why lumber prices have moved so high? Well, it boils down to the supply and demand equation both in the U.S. and abroad.
After the housing crash, lumber mills shutdown as few houses were being built and lumber prices tumbled. Lumber mill capacity dropped more than 11 percent in the U.S. and Canada. The amount of supply shrank to meet the lower demand. However, a small increase in demand from new housing starts put the market in a tight supply situation very quickly. It takes a long time and a large amount of capital to get a mill back online.
China has also attributed to the increase in demand as they are still rapidly building housing units. That should keep the lumber market strong for the next couple years and prices are reflecting it. Lumber is an illiquid market and not one you want to day trade on your online platform. However, this is a good trending market for long term traders.