The Perfect Storm - Part 2
Part 2: Numbers Don't Lie
They say numbers never lie, however, I’m not sure they always tell the whole truth, either, especially when it comes to tracking numbers related to the lumber industry. The bastion for those trying to make sense of numbers within the wood products industry is Random Lengths, a company formed in the 1940’s that specializes in tracking and reporting lumber pricing throughout North America. While RL is a fabulous resource, both for product specific as well product grouping trends, we have also found that customizing market data can be even more helpful in flushing out what those numbers mean in our world. That is why we developed our own commodity lumber price index and why we will refer to that index throughout our web series. We feel it is a better representation of the wood framing market for single family and multi-residential structures primarily east of the Mississippi River. Our index tracks a specific mix of lumber and panel products that are typically used in the types of structures we build. Each product is weighted to its approximate dollar value in relationship to the entire cost of the lumber material package and tracked as a single per-thousand value. Unlike Random Length’s weekly Framing and Panel Composite, we believe our index more precisely reflects the impact our customer’s feel when specific framing product pricing fluctuates. Specific lumber products move less in concert with each other now than they ever have, being fueled more by local and regional influences and less by the overall ebb and flow of the market. So, this way, when two major SPF Stud sawmills are devastated by explosions like they were in mid-2012, our formula can better react to the resulting impact you can expect on your lumber package.
The Run Starts 11/11/11
When analyzing the current lumber market run we have identified the date when prices bounced off the bottom and started their ascension to levels we haven’t seen in over eight years. On 11/11/11, our commodity lumber price index stood at $228/mbf. The market had traded within a $25 range of $250/mbf for nearly two years with the exception of one short-lived, but aggressive spike in early 2010. The housing market was still anemic and everyone was hunkered down trying to figure out how to keep the doors open. It was during that time that the industry saw 146 sawmill closures, many dismantled with no potential to ever come back on line. The market started a steady climb in early 2012 and in May, topped the $300/mbf for the first time in two years and only the second time since May of 2006. We had grown so accustomed to a relatively flat lumber market that it appears we lost sight of the potential volatility the market possesses. In June, the market showed some softness and numbers retreated back just under $300. But, by mid July the market was running again, with steady weekly increases of $8-10/mbf through mid September. That’s where the market paused for three weeks to catch it’s breath before surging 36% during the 2012 homestretch and peaking at $419/mbf in mid January before receding a few dollars this past week. Some analyst believe there is the possibility that the markets could spend a few weeks in seasonal slowdown mode here at the end of January but most feel that lumber is severally under bought right now and fully expect that pricing will continue it’s climb in the first quarter and perhaps throughout the first half of 2013.
The industry saw 146 sawmill closures, many dismantled with no potential to ever come back on line.
Key Product Breakdown
There are several critical products that heavily influence the price of a lumber framing package. Let’s take a look at what has happened to several of these specific products over the past fourteen months.
Real Life Perspective
I would like to share the real life impact that this lumber market surge had on one particular apartment project our pre-construction team has processed. We originally bid the project back in early July. The GC came back to us for final bid update in December. The 13 building project saw a $410,000 increase in just six months time.
To put things in a single family housing perspective - the average production house has seen a $2-$2.50 increase per square foot in the cost of a house for the same time periods (11/11/11 - 1/18/13).
Share your comments below on you're experience with this volatile lumber market. Stay tuned for Part 3 of "The Perfect Storm" where we'll explore the demand side of the Supply/Demand equation.
The Top 10 comments on this article below will receive a super soft Contract Lumber T-Shirt!