Lumber: Demand Overwhelms Tight Supply
Lumber is the best performing commodity over the last year, up a staggering 290%, and year-to-date it is up 48% only behind Cobalt.
From a longer term multi-decade perspective the scale of the rise over the last year has been parabolic. Lumber is now $1294.70 per board foot, an astounding 4x higher than the average from the last 40 years ($300 per board foot).
The physical lumber market remains very tight – the current the price difference between the May 2021 and November 2021 lumber futures contracts is about 22 percent, which isn’t enough of a discount to signal an impending price decline.
The lumber frenzy will likely continue into through the summer peak of home building as depleted inventories and labor shortages mean supply can’t keep up with rocketing demand.
US Housing Starts
The lumber shortage is feeding directly into the prices of houses – soaring wood prices have already added $24K to the price of a new house in the U.S. according to the National Association of Home Builders.
U.S. housing starts rebounded sharply in March to the highest since 2006, exceeding forecasts and indicating residential construction is getting back on track after a winter storm-related setback.
Residential starts jumped 19.4% last month to a 1.74 million annualized rate, according to government data released Friday.
Lumber Stocks
The only way investors are able to play the rise in lumber prices is through lumber producers, as there isn’t a lumber commodity ETF.
The major Canadian lumber companies have risen significantly over the last year: Interfor has lead the pack up +428%, followed by Canfor +317, West Fraser +257% and Western Forest +244%.
Valuations are elevated but not at extreme levels, West Fraser’s Forward P/E over the last 5 years has averaged 10.5x vs. its current forward P/E of 12.4x.
Capital 10X remains cautious on space, we don’t view lumber as a commodity that has a fundamental supply constraint. However we believe the flow through inflationary impact on construction will be very real and will continue to bid up the rest of the commodity complex.
Largo Resources Heading to the Nasdaq
On April 16th Largo Resources (TSX:LGO, NASDAQ:LGO) announced they had received approval to trade on the Nasdaq, shares will commence trading on April 19th under the symbol LGO.
We believe this is another strong catalyst for the stock as US investors now have a direct way to play the attractive vanadium market through one of the highest quality companies in the space – Largo Resources.
Capital 10X highlighted the sizable opportunity to invest in the vanadium the strategic green metal in October of last year when we initiated on the sector, shares of Largo Resources have doubled since then.
We believe there remains strong upside ahead in the vanadium market for 3 key reasons:
- Stimulus driven infrastructure spending will increase the use of vanadium as it is an alloy in steel manufacturing.
- The growth of green technology applications, specifically vanadium redox flow batteries.
- The strong outlook for vanadium pricing.
Goldman Sachs: Copper is the New Oil
Last week Goldman Sachs released a report to its clients stating that copper will be crucial in achieving decarbonization and replacing oil with renewable energy sources, and right now, the market is facing a supply crunch that could boost the price by more than 60% in four years.
Increased demand and likely low supply are set to drive up the price from the current levels of around $9,000 per ton to $15,000 per ton by 2025, the bank said.
Goldman projects that green demand for copper will rise from 3% in 2020 to 16% by 2030; this will be driven primarily from growth in the electric vehicle and solar markets.
Last month Capital 10X highlighted the attractiveness of the copper mining sector for investors, specifically small and mid sized miners – as they trade at a 50% discount to their large cap peers.
Sierra Metals (NYSE:SMTS, TSX:SMT) and Hudbay Minerals (TSX:HBM) trade at a deep valuation discount to their small & mid cap copper peers (which are already very cheap vs. large caps).
Largo Inc. is a market awareness client of Capital 10X.
Sierra Metals is a market awareness client of Capital 10X.
