January11

January 2013 Market Report

Anxieties of the “Fiscal Cliff” didn’t stop the homebuilding rush that started late in fourth quarter 2012 and carried right on into the New Year. The sudden increase in lumber sales triggered reactive buying amongst dealers and raised concerns about being able to fill inventory holes before the mills shut down for the holidays. This pace kept dealers and traders actively purchasing, stripping away surplus inventory from reloads and mills. By mid-December, the demand for lumber was so great that several mills went off the market even before their scheduled shut-downs, as they simply ran out of logs.

As is the norm, most dealers refrain from “loading the boat” with stock inventory as they go into the New Year (in order to avoid paying taxes on their inventory value as well as reducing the amount of stock to count for year-end-physical inventories). However, the increase in business forced many dealers to bring in enough stock to extend them through the mill shut downs and well into January. With an unprecedented run in sales for this time of year, historical sales provided little guidance. For those who weren’t keeping a close eye on their inventory on a daily basis and not defensively buying against their sales, replacement material was priced much higher than their sold inventory and it wasn’t easily obtained, even if the mill could quote it. Particularly with 2×4 and 2×6 stock, many popular mills sold off what they had prior to the shut downs and went off line with “no quote” replies to inquiries. One trader reported multiple cases of pricing spreads of up to a $40/mbf between some of the few mills that were still quoting stock, which was a clear indicator of the pricing volatility leading up to the shut downs. Consequently, some stalwart SPF dealers were forced to convert to fir at a minor discount, just so that they had something in their yards to sell. In other instances, dealers simply lost what business they could have enjoyed due to the fact that they either didn’t have their inventory covered or were priced much higher than other competitors.

Of the astute dealers that could see where the market was going, they did load their boats and covered their inventory all the way through mid-January and beyond, when mills would be safely back on-line. It’s with this anticipation that pricing would flatten out and availability concerns would be alleviated upon the reopening of the mills that returned some stability to the market. As of print, it is appearing that this is just what we will experience for this first month of the New Year: pricing is expected to flatten out after a stretch of increases and availability issues will be lessened. The immediate challenge now is determining what impact the weather will play on our ability to build and the mill’s ability to produce. In regards to our own inventory, Shepley bought defensively and early on, so we are in a very favorable position with our inventory, being that quality, price, and volume are not an issue.

According to an article in the Random Lengths (vol. 68, Issue 49), “lumber available to the U.S. through the third quarter (2012) totaled an estimated 27.6 billion board feet. That’s about 7% higher than in the same nine-month period of 2011, and the highest level for the period in four years. The gain, however, compares to a significantly stronger percentage gain in housing starts, which year to date is running 28% above a year ago.”  The recent influx of business came as a distinct blessing to an industry that has long since suffered with a modicum of activity. It is also a great illustration of how reactions to the new reality of the lumber industry will distinguish those dealers who are “in” the new game of lumber supplier from those who rely upon old habits and standards that are largely reliant upon outdated perceptions. It’s apparent that the old days of lumber buying, when a dealer could easily get what they wanted when they wanted it, are behind us for now. The reality is that homebuilding is gaining significant momentum (almost 900k in October ’12; a 42% increase over October ’11) but the lumber supply chain infrastructure (available timber, loggers, lumber mills and truck drivers) has not grown since the major reductions caused by the recession.  Considering that one million housing starts used to indicate a poor year, we are bound to see a struggle to obtain wood and, inevitably, deal with pricing volatility in the face of a lack of available lumber. In an article released by the International Wood Markets Group titled “North American Lumber Prices Forecast to Soar in 2013 and Reach Record Highs in 2014” (IWM press release, 12-10-2012), a “super-cycle thesis” surrounding the lumber supply has potential to create an inordinate lumber shortage amidst a strong demand, thereby escalating lumber pricing to new highs. Citing, among other things, the effect of the Mountain Pine Beetle epidemic in British Columbia (which is anticipated to destroy up to 60% of all pine trees by the end of the decade), plateauing Canadian lumber production (the Quebec government, which controls 90% of the provincial forests, is slated to have reduced harvesting by the 30% objective next year (initiated in 2004)) , Chinese demand (2012 saw a drawback, but consumption is expected to increase in 2013) and the role of Timber Investment Management Organizations (TIMO’s), which own forests and will have greater control on logging, (and expected to manipulate margin by controlling inventory), the article focuses on the worst-case scenarios of the lumber industry recovery. As we’ve experienced with the many hypotheses and predictions surrounding the lumber market, points of concern such as these laid out in this article need to be taken with a grain of salt because we know that no one’s crystal ball is crystal clear. There are also elements of urgency and anxiety that these articles create, which help to incite sales. The reality is that supply and demand will seek their levels, just as what we’ve experienced with this latest run of business and, in the long term, business will be drawn to where there is money to be made. As demand increases, entrepreneurs will find a way to meet the needs of the consumer and, presumably, some of the concerns that we have today with supply will be abated. The bottom line is that it will be dependent upon the progression of the recovering U. S. housing market, which is still in a state of flux. Recovery will be measured in more immediate terms, and this is where we feel that those that are dedicated to their own and, ultimately, their customer’s success, will realize and seize the opportunity that by developing strong relationships with suppliers, concerns of pricing volatility, inferior quality and short supply issues will be mitigated.

As we begin the New Year, we are seeing it as a start to a new and exciting era, one that will give us the opportunity to enjoy some long lost prosperity through new business; new business that we are eager to earn. It will be with our sincerest gratitude to have the opportunity to earn your business and prove to you that we are the company that you want to do business with.

Thank you for your support.

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