November 2012 Market Update

In what appears to be a repeat of Fall 2011, overall lumber sales in the New England region have been relatively quiet over the past two months. From a historical perspective, Spring and Fall have always been the “building” seasons (especially for Cape Cod) and suppliers try to plan accordingly by ramping up their inventories in anticipation of the business. However, this year’s expected sales levels have not yet materialized and so there is a nervousness surrounding what may occur over the next couple of weeks, as having too much or too little stock will come with its penalties. For those in the supply chain, the objective is to be well-prepared for business by carrying enough inventory “to cover your needs” or, when an opportunity exists, to bulk-buy ahead of a price increase. The problem is that defining in today’s market what the “needs” are can be about as clear as Nantucket fog because fluctuations in sales patterns are so common and varied.


There was a time when relying on historical sales data was the best strategy but, because it just doesn’t adhere to any consistent pattern any more, more attention is paid to what is ahead by observing quote levels. As we had experienced this same time last year, preparations for a “lean” winter were well underway when suddenly business popped in mid-November, spurring reactive buying, depleting back-up supplies and leaving everyone wondering how to best prepare for the coming months. Fortunately for us, the level of business sustained right through March, thanks (in large part) to the extremely mild winter we had. Should the same happen this year, we don’t believe that anyone will be complaining but there could be a few panicky moments of trying to obtain stock that won’t be there.


Since early September, mill order files have pared down, lead times have shrunk and pricing has been in a slow decline. The Random Lengths Framing Composite, which had settled at $342 at the first week of September, has only retracted a mere 7% as of print. It appears that the reason that pricing hasn’t deflated more is because dealers have been busy quoting jobs and are showing confidence that there is work in the pipeline, and so mills have been careful to only produce for current demand and not run any surplus. The general sentiment is that the market is still very “under-bought”, meaning that dealers and traders alike do not have enough inventories on hand to cover the business that is anticipated to come. This can be attributed to the lack of consistency in historical sales patterns, which is spurring a lack of confidence in banking on potential and probable business (truly a hangover of the recession is being gun-shy at buying more than for immediate needs). For our own inventory, we have been keeping regular trucks on order so that product closely coincides with market pricing; this has been a strategy that is keeping us very competitive and well-stocked. Going into November, we will maintain this same strategy so that our pricing remains sharp and our inventory levels are secure.


In the broader spectrum of the lumber market, there is a lot of optimism towards the growth of the current and future U.S. housing market, and the Canadian mills in particular are taking it seriously. Big mill producers, such as Tolko, West Fraser and Canfor have announced that they will be running at full capacity this quarter in response to demand from the U.S. and the Asian markets. New U.S. housing starts for the month of August showed an annual rate of 750,000, a 12.8% increase over 2011 and a 2.3% increase over July. Forecasting for 2013, expectations are that starts will exceed 835,000. Although any sign of growth is welcome, this is still well below the one million start benchmark that used to signal a “bad year” for building, but at least it’s going in the right direction. Having gradual and steady growth may actually help us in the long term, as the supply chain isn’t what it used to be when we had over a million starts. With so many consolidations and mill closures brought on by the recession, there just aren’t enough current resources (mills, reloads and drivers) to be able to handle any fast growth. Factor in seasonal periods that restrict foresting, and the situation can become even worse. According to an article in the Vancouver Sun by Gordon Hamilton, Gerry Van Leeuwen, vice-president of the Vancouver research firm Wood Markets states that “the coming year could bring price volatility…. brought on by insolvencies and consolidation in the U.S. distribution and wholesale sector, which have led to a squeeze in the supply chain that is bound to affect lumber prices going forward”. In summary, fewer distribution locations mean less available product thereby bringing greater price fluctuations. This scenario ties into the warnings that we’ve regularly heard from our traders: being “under-bought” is a position that will come with its challenges. Most notably, an under-bought yard will not be able to obtain inventory when it’s needed, will pay a premium for stock and jeopardize their competitive standing. Ultimately, it will be their profitability that will suffer the most.


Thankfully, at Shepley we have a great system of teamwork in place that allows us to forecast on real business and avoid being under-bought. In addition to that, we believe in investing in our inventory. Despite the national economic issues we face and the impact that it has on us locally, we are glad to report that our business is strong despite the challenges that affect us all so greatly. We have not and will not deviate from our business formula of providing exceptional service with quality products to you, our professional building contractor customer. Through our efforts in establishing relationships and applying our industry know-how, we are well stocked with competitively priced, quality materials for your next project and remain dedicated to your success. As always, we appreciate and thank you for your business!


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