Wood As a Commodity: The Process & Price Drivers Of Lumber


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Lumber (or timber) is in demand. We find out why and what drives it’s price.

Lumber is the term for wood that has been processed into beams or planks of varying lengths. It is a key commodity for a variety of industries including homebuilding, furniture manufacturing, wood flooring and kitchen cabinetry.

Evidence shows that the use of wood in construction precedes written history. In a site near Nice, France, archaeologists discovered a hut constructed with wooden supports that were built more than 400,000 years ago. Early craftsmen used iron axes, saws, and chisels to cut wood. However, by around 375 AD, sawmills – facilities for processing wood – began operating in Northern Europe.

Today lumber, which is also known as timber,contributes $600 billion to the global economy. This equates to 1% of the total global GDP. With demand for lumber expected to quadruple over the next three decades, the commodity will play a vital role in the international marketplace.

3 Main Uses of Lumber

Uses of LumberDescription
Construction
wooden door
Lumber is used in a variety of residential construction projects:

Paneling
Trimwork
Windows
Doors
Beans
Studs
Rafters
Posts

Furniture
desk
Many home and office furnishing items are made from lumber including chairs, desks, beds, tables and nightstands.
Flooring
floorboards
Lumber is used in constructing indoor flooring and outside decks.

How Is Lumber Produced?

Loggers use two categories of trees to produce lumber – hardwoods and softwoods.

About 80% of all lumber comes from softwood trees.

 Hardwoods Softwoods
DescriptionProduced from flowering trees that usually have broad leaves . Hardwood trees shed their leaves in the winter.Produced from trees that don’t produce flowers or fruits and usually have needles and cones. Softwood trees don’t shed their needles and remain green throughout the year.
Uses High-quality furniture, decks, flooring and higher-end construction projects including paneling and trim work. Windows, doors, lower-end furniture, medium-density fiberboards, paper, Christmas trees and construction including wall studs, rafters, beams and posts.
ExamplesAlder, balsa, beech, hickory, mahogany, maple, oak, teak, walnut cedar, Douglas fir, juniper, pine, redwood, spruce, yew
DensityHighLow
CostHigh Low
GrowthTrees take longer to growTrees grow more quickly
Fire Resistance HighLow
Length Availability4  - 16 feet4 – 24 feet

Both hardwood and softwood lumber receive grades based on the quantity and types of defects in the wood.

Defects include knots, holes, splits and missing pieces on the corners or edges.

GradeDecription
First or Second The highest grade and reserved only for grading some hardwoods. First- and second-grade hardwoods have very few defects and are used in projects where appearance is important (e.g., trims and moldings)
SelectThe highest grade for softwoods and some hardwoods.
CommonThe lowest grade wood. Common-grade woods are used in projects where the wood will be covered and defects won’t be noticed. Common-grade woods are further classified by number in descending order of quality (e.g., #1 common, #2 common, etc.)

Lumber designated for non-construction uses such as boxes or paper may be given other grades to classify its quality.

The lumber manufacturing process takes place in several steps:

felling trees via Pixabay
Felling trees via Pixabay

Felling

Loggers visually inspect trees and designate those ready to be cut down. Most felling takes place using gasoline-powered chainsaws. Workers make two cuts at the base of the tree to control the direction of the fall.
Once the tree has fallen, loggers trim the limbs with chainsaws and cut the tree into pieces for transportation. Diesel tractors or self-propelled yarders drag the tree pieces to a cleared area where they are loaded on trucks for transportation to lumber mills.

Debarking and Bucking

Sharp-toothed grinding wheels or high-pressure water jets remove the bark from the tree pieces. Chain conveyers then carry the pieces into the mill where they are cut into predetermined lengths.

Sawing

Millworkers saw the log pieces in one of two ways depending on the size of the logs.
Logs larger than two to three feet in diameter are clamped into a movable carriage and scanned with optical sensors. These sensors determine the optimal cutting pattern to maximize the lumber yield from the log.

A vertical band saw called a headrig saw makes a series of cuts. The first cut produces a piece of wood known as the slab. This piece is usually discarded and ground into paper pulp. Subsequent cuts produce logs of varying sizes.
Band saws process the logs smaller than two feet in diameter by cutting them into one-, two- or four-inch thick pieces with one cut.

Re-sawing

Chain conveyers move the large pieces cut by the headrig saw. Multiple-blade band saws then cut these pieces, which are known as cants, into predetermined sizes and trim the outside edges into squares.

Drying (Seasoning)

Kilns or air dryers remove moisture from the cut pieces. The pieces are stacked in covered areas with space between each stack to allow air to circulate. Air-dried lumber typically retains about 20% moisture while kiln-dried lumber retains less than 15% moisture. Interior floors, molding, and doors often require kiln-dried lumber since its lower moisture content means less shrinkage.

Grade Stamping

Mechanical or manual inspectors then grade each finished piece of lumber and stamp this information on the lumber along with the identification number of the mill and the moisture content.
Workers then bundle the pieces with steel bands and load them on to trucks for shipment to lumber yards. Lumber yards then sell the products to consumers.

Global Lumber Production

industrial logging
Industrial logging – via Pixabay

The Food and Agriculture Organization of the United Nations keeps statistics on forestry products based on these categories:

  • Industrial Roundwood: Logs used for purposes other than energy. This includes pulpwood, sawlogs, and veneer logs as well as round logs used for telephone poles, fence posts, and electricity poles.
  • Sawn wood: Planks, beams, boards, laths, etc. that exceed 5 mm in thickness.
  • Wood-Based Panels: Veneer sheets, plywood (including blockboard), particleboard, Oriented Strand Board (OSB), and fibreboard.
  • Fibre Furnish: Fibre used to manufacture paper and paperboard.
  • Paper and Paperboard: Graphic papers (newsprint, printing and writing paper) and products such as wrapping and packaging paper, household and sanitary paper, and other miscellaneous paper products.
  • Wood Fuel, Charcoal, and Pellets: Roundwood used as fuel for cooking, heating, or power production including wood used to make charcoal and pellets.

Global Lumber Production

world's biggest industrial roundwood producing countries

Top 5 Industrial Roundwood Producing Countries

RankFlagRegion
#1Flag of USAUnited States of America
#2Flag of RussiaRussia
#3Flag of ChinaChina
#4Flag of CanadaCanada
#5Flag of BrazilBrazil

Top 9 Exporters of Wood Products of all Categories

RankFlagCountry
#1Flag of CanadaCanada
#2USA
#3Sweden
#4Flag of FinlandFinland
#5Germany
#6Russia
#7Brazil
#8Flag of AustraliaAustralia
#9Flag of ChileChile

What Drives the Price of Lumber?

The importance of lumber to the construction industry makes it a highly economically sensitive commodity. Specifically, these four factors most directly drive its price:

  1. Construction and Housing Data
  2. Trade Policies
  3. Availability and Price of Substitutes
  4. Supply

Construction and Housing Data

Softwood boards
Softwood boards via Pixabay

Lumber is, by far, the most important building material used to construct new homes. On average, a new home contains 15,000 board feet of softwood. In addition, new home buyers typically purchase furniture and accessories made from both softwoods and hardwoods.

Lumber traders carefully monitor housing starts and construction data for clues about future demand. A surge in new home starts could mean a tight supply for the commodity and higher prices in the near- and intermediate-term. More generally, macroeconomic data such as nonfarm payrolls and GDP can also impact future lumber demand.

Trade Policies

The United States is the largest consumer of roundwood and, along with China, consumes the vast majority of the global supply of sawnwood.

However, the United States is unable to meet its demand through domestic production and relies heavily on imports from other countries. Canada supplies nearly one-third of US annual lumber consumption. Although the two countries share a border and a long history of friendly relations, they also have a history of trade tensions.

The imposition of tariffs and quotas in the United States can have a major impact on lumber prices.Similarly, the extent to which Canada and other exporters subsidize lumber production can also impact prices.

Availability and Price of Substitutes

Wood competes with other building materials such as plastics and metals. The demand for each of these materials will fluctuate mostly based on price and availability.

If manufacturers can source alternatives at a lower cost than lumber, then they will usually substitute those materials for wood.
Of course, if lumber prices are significantly lower than other materials, then builders might increase their demand for wood as a building material. These changes in demand can impact lumber prices.

Supply

Deforestation
Deforestation via Pixabay

Forest loss and forest change are two factors that can influence the supply of trees and, ultimately, the price of lumber.

Forest loss, also known as deforestation, occurs when people clear forests in order to make land available for industry.

Deforestation can limit the availability of trees and the supply of lumber.

Fears of deforestation can also lead countries to impose restrictions on logging and limit the availability of land allocated to the industry. Ultimately, deforestation can lead to higher prices for lumber.

Forest change can occur when the composition and fertility of soil diminishes. This can lead to lower forest yields and smaller harvests. Ultimately, diminished output produces higher lumber prices.

How is Lumber Traded?

For more in-depth information on lumber trading, see our page dedicated exclusively to lumber trading where we cover instrument and broker choices.

Here is a quick list of online brokers available in that offer trading on lumber products:

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 73.90%-89.00% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Expert Opinions On Lumber

Robert Dietz NAHB Chief Economist

Experts are generally ambivalent about the direction of lumber prices.
In the view of one National Association of Home Builders (NAHB) economist, a pattern of devastating natural disasters in the United States, including wildfires and hurricanes, should fuel demand for lumber as homeowners rebuild.

However, this demand may come at the expense of lumber demand for new construction:

“Across the nation, there typically is no persistent impact [on lumber prices] over the medium-term. One of the reasons is that construction activity during the rebuilding process will often times partially offset the decreased demand for lumber in new-home construction.” 

Robert Dietz, NAHB Chief Economist

Another NAHB economist believes more time is needed to assess the effects of natural disasters and new trade policies on lumber prices:

“Other factors are also at play right now, which further complicates things. The wildfire outlook is uncertain at this point, and duty rates on Canadian lumber are being reevaluated.” 

David Logan, NAHB economist

Sources

Credits: Original article written by Lawrence Pines. Major updates and additions in Aug 2020 by Marko Csokasi with contributions from the Commodity.com editorial team.

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