Chaotic Lumber Market Continues Record Surge
Severe shortages of construction lumber and other critical building materials continue to wreak havoc throughout the building industry during what would typically be considered the ‘down time’ of the construction calendar. Even in the face of record breaking prices for commodity wood staples such as studs, OSB, and spruce dimension, producers have been unable to fully respond to elevated demand and lean field inventories within the supply chain. The result is a chaotic lumber market that continues to set price records with every new weekly reporting period.
Contract Lumber’s Commodity Lumber Price Index has now eclipsed the previous record high of $908 set back in September of last year. Now hovering over $950 mbf, virtually no one expects the surge to stop there given the 30-plus day order files for a majority of the products tracked in our index. In the table below, I’ve listed the average yearly price our index has experienced for the previous four years so you can see the lumber market is completely void of supply-demand equilibrium. The average price of our index so far in the nine reporting weeks of 2021 is an absurd $888 – and likely to climb.
Contract Lumber Composite Annual Index Average
Unseasonably strong demand has continued through much of the winter and provided no relief to sawmills affected by labor shortages from the spike in positive COVID-19 cases. Given the elevated demand, producers simply cannot keep pace and distribution channels have struggled to keep critical lumber items in stock. OSB, in particular, has been extremely hard to source, with minimal offerings available on the open market since mid-December. OSB traders are indicating they do not expect open-market offerings to materialize until late 2nd quarter, and possibly into third quarter.
U.S. softwood lumber consumption grew by 8% in 2020, the highest level of demand since 2007. It is expected to advance by another 5% in 2021. Production capacity fell by more than 300 million board feet in 2020, reflecting the unprecedented wave of closures and curtailments due to virus related impacts. In addition to the pandemic impacts on production, 2019 saw major reductions in production capacity in the British Columbia Interior and Pacific Northwest regions due to weak lumber prices and changes in resource availability. It is this dynamic that has put pressure on the supply-demand relationship and caused prices to spike to record levels through much of 2020, and now continuing into 2021. The good news is that many producers feel they have turned the corner on production constraints related to COVID-19. Multiple producers have also announced restarting idled capacity and even constructing new sawmills in response to the surge in new orders and product prices rallying to record levels. Unfortunately, it seems unlikely that industry production will be able to sufficiently ramp up in the short term to meet the projected uptick in lumber consumption levels. And they certainly won’t be able to add adequate material production to allow depleted supply channels a chance to restock field inventories to a level that would return conditions to more typical levels for the industry. Mills still face major challenges staffing new lines and new facilities moving forward, so the process of adding wood production will be measured.
Like many things in life, the lumber market has become much more complex. Lumber products used to move more in concert with each other. There was a predictability to the system. And while there is still some obvious connection between the various products, species and producing regions, recent history would suggest that there seems to be considerably more independence to these markets than ever before. Factors like resource base, a producing region’s unique transportation environment, a region’s recent weather patterns, the individual technological advancements of producing mills in an area, and a whole host of other influences, all impact pricing on individual products within a specific market arena. In other words, a significant weather event in the Inland Empire producing region of British Columbia, may cause a spike in the western spruce-pine-fir pricing due to the impacts to rail and truck traffic, as well as the inability to secure adequate log supplies because logging activities were hampered. OSB, for instance, has very much developed into a market unto itself – even to the extent each producing region’s pricing can move autonomously. I say all this just to point out that traditional patterns that lumber buyers have used to trigger decisions for eons, have been disrupted, and are constantly being reassessed and altered.
The growth in lumber consumption that has taxed supply, has largely come from the performance of the housing market, whose strength has surprised nearly everyone in the midst of a global pandemic. For the fourth consecutive month, U.S. housing starts in January came in at over 1.5 million units Seasonally Adjusted Annual Rate (SAAR). The real story has been the resurgence of the single family homebuilding sector, the backbone of America’s housing market. In each of the past six months, single family starts have topped 1 million units SAAR, a run the likes we have not seen since 2007. National multi-family starts have not fared as well since COVID-19 undercut housing’s momentum last March, although January MF starts posted the second best month since last February. Housing starts are expected to remain strong through 2021 as homebuilders continue to report robust new home sales activity week after week. And even though builders are expressing concern over supply constraints stemming from higher wood prices and the availability of other building materials and new home goods, these constraints are not expected to significantly impact growth projections for this year.
Certainly one unique development from last year that has the lumber market’s attention coming into the 2021 spring building season, is the unexpected surge in lumber sales brought on by America’s sequestered workforce due to the Coronavirus. With people spending more time at home, many pivoted freed-up disposable income toward improving their homes. Subsequently, the DIY and R&R markets exploded in late spring, completely catching lumber producers and big box retailers off guard. Lumber demand in these categories grew by an impressive 15% in 2020. Given soaring homeowner equity, and the lingering effects of the pandemic on the work-from-home population, expect continued spending strength from the renovation market again this year. The lumber market is already seeing indications that home centers are fighting pro-dealers to gain more of a share of the lumber supply. The situation will only add to supply-chain challenges over the next few months with a new round of economic stimulus checks heading to bank accounts.
The dilemma for lumber buyers right now is how do you manage getting enough lumber at your disposal to keep jobs moving forward, without risking having too much of record high-priced wood on the ground when the market does correct – and it will correct! The balancing act is keeping lumber buyers awake at night. Scouring the marketplace for available shipments has become their dawn-to-dusk mission, with an emphasis on taking care of the customer, while trying to protect the profitability of an organization. It is safe to say that there has never been a more challenging time to be in the lumber business. And I’m sure the same can be said for being a builder in these arduous times. Never have the prospects of success come with strings attached that seem so outside of our control. The saving grace this time around is that the housing industry is leading the economy out of recessionary times, rather than into them.
As the first quarter winds down, and we head into the brunt of the building season, it is important to reinforce that the underlying current of an undersupplied market remains with us. Wood markets will continue to experience an unprecedented level of volatility and price pressures. And while the expectation is that lumber supply will be ramping up, lean channel inventories will most likely force buyers to come back into the market when they perceive even a hint of pricing values starting to develop. Unfortunately, the numbers will not look anything like a value, historically speaking, so expect a higher floor for lumber pricing for the foreseeable future.
I think the more immediate concern the building industry faces even over pricing is the possible disruptions building material shortages may cause in the construction process. And while these concerns certainly include critical lumber products, they also include a host of non-wood related products whose absence has the potential to stop a project dead in its tracks. So while lumber is the most visible product category on builder’s radar right now, mainly because lumber is such a big-ticket item (lumber costs on an average new home have increased by $24,000 since 1st quarter 2020) in a home’s construction, the list of potential product shortages that can slow down the construction process is growing daily.
In closing this report, I’d like to focus on some of the positives that resonate with me from my experiences of the past year. First of all, I am so thankful to have spent the last thirty-plus years in an industry that values integrity, and still puts a premium on relationships. An industry as resilient and dedicated as any in the country. The housing market is the fuel that makes our country’s economic engine purr. It has been a privilege to carve out a career in an arena that is so vital to so many American’s. Secondly, I have spent a majority of that career working within a family-owned business that values people over profits, and that places trust in their associates. The number of times I have seen those tenets positively play out in people’s lives the past twenty-plus years is heartwarming. And finally, the one attribute that becomes apparent from this past year that means more than any other, is loyalty. I have witnessed firsthand, how instilling loyalty within the culture of an organization can manifest itself in overcoming any obstacle. I have seen it play out inside our organization. I have observed it in interactions throughout our customer dealings. And I have especially watched how loyalty has had a positive impact when working through supply-side challenges with our core vendors. Yes, it has been a difficult year, and the struggles are certainly not behind us. From my perspective, what makes all the difference in getting through the struggles, is who you choose to do it with.