March 2012 Market Report

There is no doubt that there is a fresh optimism within our industry that business is improving. According to one trade magazine, Pulse Research has announced that consumer confidence for lumber consumption had increased a significant 28% from 4th quarter 2011 to 1st quarter 2012. At the local level, it was observed by many who had attended a recent annual trade show sponsored by the Northeast Retail Lumber Association that the doom-and-gloom perspective that had been so pervasive for the past several years seems to have dissipated almost entirely. The irony is that the Chicken Little “the-sky-is-falling” anxiety that has been focused on a lack of business has been shifted to concerns over a lack of supply. Certainly, this unquestionably mild winter has been a boon for business as we have rarely seen this kind of activity in the dead of winter; it may be unanticipated, but is definitely welcomed with open arms. However, it has caught many in the supply chain off-guard. In the fall of 2011, the general sentiment was that we all needed to hunker down for the next six months (as business was expected to be flat at best) and contingency plans were put in place to account for an anticipated reduction in sales. Instead, business has been good and has kept local yards busy scrambling to meet demand. From opposing opinions, one could say that we are experiencing the spring push early as the weather has made it conducive for building. On the other hand, the belief is that consumer confidence is stimulating the economy and this just may be the point where we are finding a steady and regular level of business, rather than the deep, long valleys and brief, short peaks of recent years.

Brisk business has put a strain on already thin lumber inventories. As we near spring, concerns about covering inventory needs has stimulated even more buying as traders have been advising retailers to cover needs for at least 30 to 45 days. The caveat to protecting yourself in this manner is the significant drop that the market can have in a short period of time. For instance, the plywood market endured a $30/m + increase in the space of three weeks in December 2011 at a time when inventory levels were painfully thin; thin enough for some our suppliers to have been out of some sizes altogether for the entire month of January. As a reaction to replenish their inventories, they bought heavy on trucks that were six weeks out…..only to watch the market deflate $30/m and more during the month of January. As a result, the panic reaction to get a lot of inventory on order while prices are escalating can easily punish you with higher-than-market-priced inventory once shipment arrives. Lumber mills have not produced enough inventories to build up an ample enough supply to meet any significant demand and, with the mild winter we’ve had, what is produced is quickly shipped out to retail lumber yards. As a result, reloads are remaining remarkably thin on inventory and obtaining tallies tailored to exact needs is a real rarity. In addition, most mill orders are taking 2-3 weeks at a minimum to arrive (which is plenty of time for a significant swing in market pricing). Further exacerbating the supply availability is the fact that trucking is still not able to meet up with the demand of shipments. So often an order is late that the new strategy is to order material with a request date that is far ahead of when it is actually needed, in the hopes that it will arrive when you want it.

Our traders keep their ear to the ground on all daily activity of the market and offer up the best advice they can muster, and the common and constant warning that we are hearing from them is that the “market is severely under-bought”. To be “severely under-bought” means that there aren’t enough inventories at any level of the supply chain (mill, reloads and retail yards) to fulfill demand at a service level that is expected at a “normal pace”. As a whole, there is a six month’s supply of lumber in the market based upon current levels, but what will happen if business hits a level that is above normal? That is the key part, as what business is expected to be is still the great unknown factor, and one that mandates retailers and wholesalers alike to keep their fingers on the pulse of business and react not too soon and not too late, but to order as needed. This strategy is keeping the inventory levels low, but there has been a quantum shift in attitude throughout this industry that may help keep a purchasing momentum going into the spring that may shift the dynamics of the current lumber supply. Not the least of which being China’s demand on better grades of wood, supply may be significantly affected by the American market as it may finally have its draw up on  home building (which will bring to us the welcomed set of new challenges of allocating materials).

As we pull out of winter, lumber prices are holding steady with the potential to creep higher. Even if demand slips, we are not expecting pricing to come off much as mills continue to limit supply based upon cautious buying at the reload and retail levels. Although the market may be severely under-bought, we can say that we are not. Through our contracts, well-developed relationships and attentiveness to our inventory, we can guarantee you that we will have quality wood at competitive prices on hand when you need it. It is our commitment to you that we are the company that “does it right” and that you want to buy from. We realize that we must earn your business every minute of every day and it’s a challenge that we gladly accept as we consider every order we earn a victory. Thank you for your business and, should have any questions or concerns, please remember to contact your lumber sales person.

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