April 2013 Market Update

The consistent pace of construction is keeping available lumber supplies slim and, subsequently, lumber pricing firm as the market continues its run into Spring. Many lumber yards are busier than they had expected and have had to continue buying based on the speculation that construction will remain strong over the next few months. This is certainly bolstered by the positive news stories of late, citing declining unemployment, fewer foreclosures and rising home prices.  The phenomenon that we’re experiencing now is that these positive news articles are further fueling the doom-and-gloom predictions that prices will escalate against the lack of available building materials this year, as the housing demand explodes beyond current capacities. Manufacturers are warning of impending price increases (based on raw material and fuel costs) and putting a lot of pressure onto buyers to not miss an opportunity to “beat the increase”. The paradox to this is that purchasing decisions made to beat an increase can create a significant backlash if business subsides and inventories become overinflated. The old adage that “what goes up, must come down” rings true for market situations where fast and steep increases occur, and it appears that we are in the midst of one of those situations now. In any case, we are cautious in nature and plan our best according to current market conditions, and have the “gut” for knowing when to react and when not to. Business is up overall for 2013 (and we are anticipating that moderate trend to continue), so we have covered our needs well into Spring and are well-stocked with quality, price competitive lumber.

It’s interesting to note that today’s Random Length Framing Composite is, as of print, $423. The last time that it hit this level was March 2005 (at $422), eight years ago. This was before any of the recessionary issues had become apparent and also when housing starts were well over 2 million per year. Take into consideration the increases of just about every other building material over the past eight years and you would be hard pressed to find another item that is the same price as it was eight years ago. For example, asphalt roof shingles are almost double the price that they were then, and steel items are, on the average, 75% more as well. The irony to this is that there are fewer lumber mills and less lumber in the market, so why would pricing not be, in fact, greater than it was when housing starts were over 2 million? Why the difference? The reason is that lumber is produced to meet demand and is a specialized product; it isn’t a material that will be commonly used in other commodity products (like petroleum and steel). In addition, with the decline of paper consumption, pulp mills aren’t demanding as much wood as they once were, thereby allowing more wood to go to the lumber end of the business. As a commodity, lumber is abundant and renewable, and can be sourced from many different regions. Because of this, opportunities exist to source lumber from other markets that may be at a price advantage to our current sources. As Domestic and Canadian fiber pricing escalates, it makes it easier for other markets to compete in the U.S. markets (and the European market, in particular, is well-poised to do just that as they see our higher prices sustain). This will, inevitably, add to lumber inventories and potentially flatten out pricing. Another factor that can (and likely will) attribute to more lumber in the market is that most mills scaled back production due to the recession. With increased demand, they now have the opportunity to add additional shifts or reopen closed lines and ramp up their production. Further still, during the recession some mills chose to close entirely and mothball their businesses until the economy rebounded. With the certainty that construction demand will continue to grow, the likelihood of them jumping back into the game is great. The reality is that, where there is an opportunity to capitalize on a need, smart business people will seize the opportunity and find a solution, and subsequently reap the benefits of their efforts. With regards to building materials, there is no doubt that there are thousands of opportunists at every level of the supply chain that are paying close attention now to where an opportunity may exist. We also cannot disregard the opportunists who are currently part of the supply chain; lumber mills and traders are certainly enjoying today’s prices and have no desire to see them deflate. There is much propaganda generated to try and stimulate buying, and it can be difficult to dispel or refute the claims. Sooner or later though, you learn who’s just banging their pots and pans in an effort to incite buying, and who has a more reasonable, factual and less emotional message to deliver.  With as much talk that is being done about how lumber prices are going to escalate this year due to shortages, there is a quieter message that is confidently arguing that a steep and fast rise of lumber pricing will be offset by a decline, based on the premise that there will be more supply infused into the market (either through increased production or through exports). As history can prove, what goes up does come down and the lumber market is no different. The key is not to overreact in one direction or the other and it is with this in mind that we proceed with caution and buy defensively in an effort to maintain our inventory at competitive levels.

We acknowledge that we are definitely on the upswing of the building recovery and realize that 2013 will present its share of challenges as we continue to emerge from the recession. As the lumber market stands today, we are seeing a trend in which pricing is likely to increase over the next four to six weeks (as Spring business pops) and, as it usually does, a flattening and relaxing as peak demand subsides. Keeping our “fingers on the pulse” of the market is our best strategy, as we will react where needed and think twice before doing so.

We thank you for your continued business and ask that you please contact us if you should have any questions or concerns regarding your upcoming jobs.

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