March 2013 Market Update

Much to the surprise of many, the lumber market continues to pick up momentum at a time of year when activity is usually quite dormant. There has been little faith in buying beyond immediate needs as the unexpected rally that was enjoyed over the past several months had led many to think that a retraction was soon coming, and that mindset was not wrong. At the beginning of February, we saw pricing slide somewhat as mills got caught up on their order files. Dealers and wholesalers alike refused to take an early position on spring buying, adhering to only buy enough to fill their immediate needs as they anticipated prices to slide further and an opportunity to buy low would present itself. This strategy would have worked out well if the timing was right, but some unexpected buying from the Asian market and a continued rebound of the U.S. housing market drew confidence from traders, which unexpectedly pushed the market back up. As a result, many local dealers and wholesalers were caught flat-footed, and had to buy at a higher price than they had hoped for as scheduled jobs needed to be covered and stock needed to be bought. By the time mid-February arrived, many wholesalers and larger dealers were busy buying as they had underestimated the amount of inventory that they thought they would need until spring.  As the market climbed based on this demand, several traders and larger retailers were buying on speculation well into March and this was based on the premise that prices would continue to climb as spring drew near. However, weather still played a major role in sales activity and as the “Blizzard of 2013” had shown, we weren’t done with winter and there was great potential for a considerable delay to the sales momentum. Nonetheless, with U.S. housing starts jumping to the highest level since June 2008 and building permits hitting a rate of 909,000 (the highest since July 2008) business is surely in the pipeline. As spring draws near and more jobs start, we may see another run up on pricing. In the meantime, lumber pricing is holding firm and not likely to relax over the next six to eight weeks.

“One man’s hedge is another man’s gamble.” – Tony Shepley

Most people who have gambled will agree that there is little opportunity to come out on top with a winning. It’s the luck of the draw and well-executed decisions that give one the best opportunity to win. Although there is no guarantee on a gamble, the excitement of the potential of coming out on top lends to the entertainment aspect of recreational gambling. Speculating on where a particular market is going in a business setting is akin to gambling, although the result may not be quite so clear (and it’s certainly not entertaining). When buying against the lumber market, one can never predict what influences may or may not occur that will significantly impact the value of lumber at the time that the bill is due. Hedging ones’ bets that a particular alignment of situations is the ideal time to gamble on buying heavily into inventory (with the anticipation that it will be worth more) is a true risk as, by the time that delivery is taken, events could dramatically change the outcome. The lumber industry operates on extremely low margins and it is a commodity that has the distinction of having very high “highs” and very low “lows” in a short period of time. It can make a lot of sense to take the risk to try and squeeze out a higher profit margin when you can buy low and sell high. However, today’s market is still quite volatile as compared to how it was prior to the recession, and it hasn’t quite fallen into any patterns that would make buying on speculation a wise decision from the dealer level, especially when volumes are still comparatively low to pre-recession levels. Although it used to be a great opportunity to gain additional margin, it can safely be said now that that was when the economic factors that played a key role in the predictability of influential circumstances were more predictable.

Today, with lumber being a global commodity, impacts to the market can happen in a minute’s notice and the risk is far greater than it used to be to hedge against the market. Sure, opportunities do still exist, but the reward may be minimal as compared to the risk which would take the form of a significant price penalty a dealer or wholesaler would pay if they were to get it wrong. We are often asked if we can beat the impending advancement of price increases by buying in bulk prior to increases and, often, we can if it is a product that is not part of the commodity market and stands the great likelihood to hold its value. With lumber in today’s climate, we believe that the best approach is to act on opportunities when we can and take advantage of our contracts and relationships with traders. Our contracts help to insure that we have wood when we need it and at a competitive price and our relationships with our traders help give us insight to impending issues that oftentimes give us a chance to seize an opportunity before it’s announced to the world. The “loading the boat” approach to purchasing can have a profoundly negative effect on pricing in an unstable market, so we choose to  average our costs by carrying enough inventory for a typical month’s worth of sales and, if we need to do our own hedging, to have on order another month’s worth. By working with our average rolling costs over a six to eight week period, we are able to clip the peaks and valleys from the costs of the materials, and provide you with a bottom line, cumulative price quote that is as competitive (and oftentimes even more competitive) than those yards that choose to buy on speculation.

As we head toward spring and the weather becomes more conducive to building, we do expect a busy building period. You can be confident that we have covered our inventory needs with the quality stock that you have come to expect from us and we are well-poised for business. As always, please be sure to consult your salesperson should you have any questions or concerns regarding any current or upcoming jobs and thank you for your business!

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