2020 has been full of uncertainty and a real challenge for businesses, to say the very least. But for those of us in the building industry, we have had some cause for celebration over the last several months. Being deemed an essential business has allowed us to continue to work and keep people employed throughout the pandemic. Even with the market declines in April, the record jobless rate, and the drop in US real GDP, the building industry has been more resilient in its recovery than other sectors of the economy and Builder Confidence is already at levels we were seeing before the pandemic.
How have the last 6 months affected the lumber market?Mills and manufactures adjusted production based on projected future demand, which early in the year looked grim, based purely on the economic indicators. There was a real slowing of the market in April when we were all trying to figure out what was next. Then we all had to figure out how to get back to work safely, which took its own toll on production. Now we are all getting the hang of this “next normal” just in time for seasonal mill shutdowns and hurricane season.
There is not much out there that gets lumber speculators more animated than the combination of pent-up demand and the chance of crisis, whether real or imagined. If you have been watching the lumber futures the last few weeks, it is clear they are not holding back.
This along with the general uncertainty of what’s going to happen from a national political, geo-political, economic, and public health standpoint, have led to a perfect storm of panic. That panic has fueled material hoarding, which further (and artificially) increases demand and has resulted in unprecedented increases in material cost.
A recent example that most parallels this in my mind is the toilet paper shortage. In February, toilet paper wasn’t an issue. On a whole, our need for toilet paper did not change but when a shortage was speculated some people stocked up and a few more people thought it would be a good time to get into the toilet paper business. Now you’re standing in line and the person in front of you and the person behind you has a cart full of two ply and you think “I better load up before it’s too late”. Now something that was not an issue in February has become a real life shortage in March and you are stuck buying a role of one ply in a back alley for $25 a roll. But as time passed, manufactures rallied production, shelves were restocked, panic settled, and almost as fast as toilet paper was a problem, it was a no longer an issue.
What does this mean?We are seeing prices adjust upwards at rates never seen before as mills use future projections to justify increases and dealers continue to inflate demand by panic buying. We will experience material shortages as mills work through order files and get tooled up for continued increased production requirements. We also have no doubt that we will be thrown a couple more curveballs as we brace for hurricane season and face uncertainty, politically and economically. As generally is the case, what rises quickly falls quickly, and as lumberyards and distributors get their stock levels up in response to future forecasts and mills get back to production we should see a correction that mirrors the severity of the increases we are seeing.
In round numbers, the month over month increase in August were as high as 10% on certain commodity items and will be closer to 25% in September. To put that into further perspective we generally see lumber accounting for 20-25% of building cost. An increase in lumber pricing of 25% contributes to a total increase in the total cost of the house in the realm of 6.25%. 25% increase x 25% of total cost = 6.25% increase to total cost, or an increase of 35% equates to a total cost increase of 8.75% for the house. A bit of good news is the Engineered Wood Products prices have stayed much more stable. So if you are already using EWP you won’t see as sharp a rise and if you are not, you can offer your customers an upgrade at smaller premium.
What is Shepley doing?Shepley is fortunate to have a buying group that both understands the market and takes the appropriate action to minimize the effects of volatile pricing on our customers. We have watched the demand in our market closely and maintain regular dialog with our customers regarding upcoming volume to ensure a good stock position. Beyond that, in anticipation of the increase in lumber futures, we have taken a stronger than normal in stock position. So even though prices are adjusting at unprecedented rates we will leverage our stock position to ensure that our customers do not feel the full brunt of market increases.
We are already seeing dealers in our industry tighten quote expirations to a week or in some cases less in response to market volatility. Shepley will continue to honor our commitment to quoted pricing for 30 days.
Most importantly we are here as a trade partner and welcome dialog on how we can work together to support the success of your business. Price is important but it is not the only way to add value and profit to a project. So please reach out to your sales person to discuss upcoming projects and how we can work together to ensure their success and profitability.