November 2017 – Lumber Update

by Paul Rogers,

Much to the surprise and dismay of buyers, the market continued to rally in October to uncomfortable levels. Day to day, buyers were actively buying to fill holes and to secure supply, but hesitant to do so based upon the prices they were paying. This demand kept traders hopping and prices escalating as supplies tightened, and late deliveries were rampant as trucking became even harder to obtain. The volatility risk seemed to escalate as well as the higher and faster prices climbed the harder and faster they were likely to fall. This latest rally has largely been felt to be based upon supply fears (due to hurricane damage, wildfires restrictions and trucking shortages) rather than actual demand as new home sales and housing starts don’t appear to be working in sympathy to the outtake. Inevitably, inventories will become flush, purchasing will subside and a correction will occur but to what extent is a source of angst. With the winter season right around the corner, there is developing anxiety that the market may have overreacted in terms of volume buying, instilling a fear of not being able to quickly shed high-priced overstock when the market corrects.  If inventory doesn’t turn in pace to a market retraction (or if a development surrounding the counter-vailing duties materializes), we may witness a significant correction but, in the meantime, it is too soon to know. Depending upon how the market digests inventories in November will set the stage for what pricing we will see toward the end of the year but, for now, the market is firm and mostly flat, still considered volatile and anticipated to remain so throughout the month.

As is frequently the case with rallies and the fever pitch they instill, much of the buying is based upon forecasting anticipated “needs” and beyond, but not necessarily actual demand. With the uncertainty that comes with price volatility and arrival dates, it’s a common practice to order “safety stock” which is, essentially, overstock. Overstock has its place but, particularly with commodities in a falling market, may become a very big detriment as it can lose value in an instant.  There are many different strategies that companies employ to purchasing material, depending upon their role in the supply chain, their size, customer base and level of sophistication. In all cases, however, “needs” are determined by reviewing past sales history, present inventory levels and future sales. At this particular time of year, our industry goes in to high-gear on the supply side for planning and establishing purchasing programs for the coming year. Forecasting, in this case, is almost exclusively relegated to studying past sales history in conjunction with anyone’s best guess as to what can be anticipated in terms of upcoming business. Sales history used to be the most reliable standard in determining how much and when to order material (and it still plays a strong role today), but it has become more unreliable due the many factors that now interrupt construction, such as labor shortages, supply interruptions, a more volatile weather climate and increasingly complicated building regulations. And although there are many systems used that employ complicated algorithms that take in to account the minute details of purchasing and stock levels (such as seasonality, pack sizes and lead times, to name a few) perhaps the most accurate and best way to determine potential demand is by speaking with your customers and suppliers and understanding what they are experiencing and what they anticipate in the near term. In the end, what does this mean for you? We bring it up because the best defense in protecting all of us against market conditions is to communicate clearly with your suppliers and customers (as we do) to determine what you’ll need and when you’ll need it, to the best of your ability. Knowing in advance is a huge advantage for all of us. As much as what we do in this business is “horseshoes and hand-grenades” (meaning that we all do a tremendous amount of estimating in many different facets and hope for the best), we can become more accurate by sharing what we know when we know it. As is the case in this latest rally, the buying that has occurred that has been based upon fear can unnecessarily wreak havoc with prices and supplies for everyone, with the added potential to create even further damage if sales don’t meet expectations. The more that we can all work together by better communicating our actual needs, the better we can defend ourselves against explosive rallies.

Even though we have instant communication at our fingertips and many methods to share our plans and ideas, our busy schedules and constant interruptions have a propensity to distract or interrupt many of the thoughts that we have swimming in our heads that we intend to share. As you may or may not know, we have open lines of communication in this company and will gladly provide any assistance that we can offer to you (especially for current or upcoming projects) and welcome any feedback that you can provide in terms of how we can better serve you. We hope that we can continue to earn the opportunity to prove to you that we are the company that you want to buy from and, sincerely, we thank you for your business!


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