February 2013 Market Update

The unexpectedly high demand of lumber in January continued to drive down dealer and reload inventory levels, forcing many to replenish their stock at somewhat uncomfortable price levels. Activity was strong enough that dealers continued buying through January, even those who had taken the pre-New Year advice to cover lumber needs for six to eight weeks. Although the steady stream of purchasing was strong for the beginning of the month (and likely influenced by the suggestion to continue to cover lumber needs), by mid-January the tone changed and traders were warning to buy with caution and only enough to cover your needs. This was largely attributed to the expectation of a price retraction as more and more mills came back on-line and were able to produce and meet demand with sometimes prompt deliveries. Dealer demand did remain strong throughout January but pricing increases did subside as the month progressed as more and more lumber was produced. By February, determining where demand would take the market next remained elusive and so speculation became even more conservative and kept most to the sidelines and adhere to the “buy it if you need it” philosophy. However, that was easier said than done as oftentimes, by the time a dealer determined what they needed, available mixed tallies where hit and miss and lead times were often two to three weeks out. As it turned out, mills were busy producing but still didn’t reach the point where they could all provide requested tallies or prompt shipments: they still had limited offerings as they were trying to catch up to January business. Currently, most in the supply chain are taking advantage of a little uptick in business and are also channeling their efforts towards analyzing what their needs will be for the spring season, diligently trying to determine how they can best prepare for it. Depending upon what is seen on the books for potential business, a rally may ensue but, as of print, prices remained firm with little lee-way. There is a solid expectation that a mild retraction will occur (especially if weather conditions deteriorate), but there is also strong optimism that there is more business to be had once the winter is over, revitalizing demand and propping up pricing.

With every cycle of market fluctuations that we experience, whether stimulated by raw material shortages, unexpected demand, natural disasters or global impact, we are able to learn a little more of the nuances of the new and revised post-recession market. It has been a long time since there has been any consistent demand to the lumber market; in recent years, it has been characterized by brief peaks and valleys as pricing has followed suit. On the whole, pricing has remained well below the historical norms but one commonality has been the sensationalism built around the fluctuations, and the anticlimactic result as it passed. There is much drama built into what could be: pulling the truth out of the prophecies and determining what impact they may have on our livelihood make for lively conversation but also, to some extent, instill a lot of anxiety. Just about everyone in this industry has an opinion to offer as to what can potentially happen to our market, but the sage advice comes from those that look at the entire process of homebuilding, from the forest to the homeowner, and take everything that may affect conditions into account. In addition, they realize that over-reactions are a factor of human nature and that those who likely to incite fear and panic with their opinions must be taken into context and challenged.  One machine of the new age that contributes to expediting fear and panic is our media, which is a major contributing factor to the manner of our industry’s response to any noteworthy tale. In an instant, a sensational article can be spread to all players in the supply chain and fervor can ensue. There is plenty of reporting that is done to educate and inform us, but the writers also know that the first rule of selling a story is to build in a level of sensationalism that will catch everyone’s attention and get people talking and, oftentimes, buying. Bolstering their claims of the next major pending issue with the latest (and oftentimes obtuse) facts and figures helps them to argue their predictions. The latest round of sensationalism is surrounding the recent increase in lumber pricing that we’ve seen, comparing current figures against our recent history figures, more specifically, our recession years. As you’ve heard from us numerous times, the Random Lengths Composite is a figure used as the industry “barometer” of lumber pricing: it is designed to be a broad measurement of pricing movement. Currently, our composite is hovering in the $380/m range, which sounds like quite a drastic climb from even one year ago when it was almost a full $100/m less. But what needs to be understood is that we have come from a period of such low lumber pricing that the low numbers that we had become accustomed to would never be able to sustain this industry. As a matter of fact, in order for mills to remain in existence, the composite has to be at $300/m just for the mills to break even. Compared to the heyday of 2005 (and before recessionary influences did their damage), the composite was where it was today at $382/m (and it even spiked to $420/m for February of that year). The composite ebbs and flows month to month, and yearly averages more accurately reflect pricing trends. For 2012, the yearly average as $322/m, the first time that it has broken the $300 mark since 2006 (at $327/m). What needs to be taken into context is that we are in the midst of a rare rally, the first in years that is bolstered by optimistic factual news that more business is to come, which is cause for the increase in pricing. Ours is a cyclical business, and extreme highs and lows are never permanent: often, they are over-reactions. We can’t forget that for where there is a demand, entrepreneurs will find a way to fill the void if they see an opportunity to earn a profit. As the reality of a housing recovery becomes a dawning fact, we can expect continued fluctuations and will need to keep in mind that there will always be an ebb and flow to supply and demand, contributing to the highs and lows of pricing.

It is our job to best interpret and filter industry propaganda and provide you with what we know are truths that are relevant to both of our businesses. In addition, we know that the success of our business depends upon how well we can provide you with your needs, being quality, competitively priced products that can be delivered to you when you need them. We realize that we are susceptible to market fluctuations as much as any other lumber yard, but it is our job to make informed purchasing decisions that allow us to clip the peaks off of pricing spikes so that you don’t have to let extreme market conditions become another burden for you to bear. Through informative venues such as our Shepformation, we hope to provide you with relative market guidelines that give you a month-to-month snapshot of market conditions. But we also realize that it takes more than our Shepformation articles: we need to be there for you to convey the latest information on a day to day basis, through the efforts of our highly trained and well-informed sales staff. Please do keep in mind that, although we speak in terms of “the market”, we can provide you with more concise and specific information as it relates to any of the building materials that we sell (engineered wood, roofing and siding, millwork, hardware and more). All of our departments are affected by conditions brought on by the supply and demand of building materials in general, and each follows its own cycle of price fluctuations; they may not be as frequent or dramatic as lumber, but they occur nonetheless and we work very hard to make sure that they do not become your issues. We also realize that you have to be able to forecast your own budgets and that requires us to provide you with as accurate information as possible as to where we see things going. Although no one can predict where the market may go with 100% accuracy, we can assure you that we will not only keep you well informed but will also buffer wild swings so that you will not see drastic changes in any short period.

Thank you for your support and, as always, please feel free to contact us should you have any questions or concerns.


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