Early Year Lumber Market Strength Staggers Building Industry
After a year that returned the lumber market to levels of volatility not seen in over five years, everyone was hoping that we would catch a break in 2018. Hopeful things would settle down to more traditional purchasing cycles, with more predictability, more stability. For the first six weeks of the year, the lumber market has been anything but predictable, or stable. In fact, its uncharacteristic early year strength has staggered lumber buyers at every level of the construction process – suppliers and builders alike – forcing many to alter their customary lumber buying decision process.
January is considered a relatively calm period for lumber market movement. In the past decade, it has gone up in January as often as it has receded. None of that movement consisted of more than a $20 swing. So far this year, Contract Lumber’s Composite Index has surged $57.42 (15%), and currently sits at its highest level since early 2013. One leading industry reporter showed 21% of the lumber items they track, are currently at record highs. Nearly 500 items have reached record levels since the start of 2017. That certainly constitutes a bull market to start the year, and our Composite Index bares that out. Five of the seven products we track for the index have experienced double-digit increases since January 1, with several items up twenty-percent, or more. The spike in OSB prices especially has everyone’s attention because it constitutes such a large percentage (25-30%) of a typical structure’s total lumber package. While OSB is historically one of the most volatile lumber commodities, no one was expecting January prices to skyrocket quite like they have. Of concern, current levels are still 12% below their highest level last year, and 24% lower than their highest level reached in the past decade, March 2013. In other words, current OSB levels may seem like a value a month down the road.
CL Index Since Jan 1 2015
Most traders agree that there seems to be very little short-term downside in this market, as lumber production levels fail to keep pace with demand. Order files at many sawmills are out well into March, some to the end of March. It’s hard to envision what could possibly put any significant downward pressure on lumber in the next 45 days. Mills are firmly in control of the supply and demand equation. Dealer inventory levels were low coming into the New Year, not an unusual occurrence. What is unusual for January is the level of construction activity taking place. Dealers are busy all over the country, shipping truckload after truckload to the jobsites. We are battling a chronically undersupplied distribution system where supply-side constraints and just-in-time purchasing strategies have created somewhat of an uncertain environment – and commodity markets do not like uncertainty. Producers are constrained by a shortage of logs, high log costs, and serious labor challenges. Lumber buyers are hampered by lean inventory levels with active sales logs, and major resistance to paying such high levels for lumber. This hand-to-mouth purchasing mentality has enabled the mills to better manage their production to their advantage. They are commanding higher prices, and holding to their quotes. Their attitude – if you don’t want my wood at this level, the next guy will, and may even pay more for it. It is also reported that some dealers are bumping up against their credit limit, further complicating procurement. And even if a dealer or distributor wanted to make a major block-buy, there just isn’t the available wood being offered out there, due to tight mill supplies.
If all that wasn’t enough, throw persistent transportation issues into the mix, and you have a chaotic recipe that is driving lumber buyers crazy. Railcars are in extreme short supply, forcing some railroads to only service main line tracks in order to get their cars back quicker. The cars that do load, are habitually late, forcing buyers to try and cover needs out of warehouse even when they have wood rolling. And shipping by truck can be just as frustrating, with driver shortages and new regulatory restrictions handcuffing over-the-road resources across the country. The result – many buyer’s just-in-time purchases have turned into nearly-in-time acquisitions.
We all knew that 2018 had the potential of being another volatile year for the lumber market. The U.S. – Canadian trade dispute continues to fester, housing starts are projected to increase, likely putting added pressure on the lumber supply chain, and the country’s economic engine generally seems to be purring along with only a few sputters (stock market correction, partisan politics, etc.) felt here and there. The best way I can think of, to deal with this kind of upheaval, is to simply stay informed. Be vigilant. To make an educated guess, you first need to get educated. Remember – this is new math. The market is in a period of turbulence and you can throw recent history out the door. Do your due diligence. Consult with your Contract Lumber salesperson. Absorb every perspective you can. And understand that your existing budgets may not get your building built, using old math. Yes, it is a very difficult time for all of us. But together, we will get through it. That’s what building partners do – overcome challenging times.