Lumber Supplies Remain Tight for Foreseeable Future

Marketplace demand has eclipsed lumber supply creating high lumber prices and tight inventories

By Charles Wardell

Predictions of continuing shortages in dimensional lumber are being borne out in the marketplace, and industry observers say dealers should keep enough lumber on hand for jobs sold for delivery over the next quarter, if possible, and work hard to cultivate good relationships with lenders, since credit remains tight, and lumber prices high.

The gap between lumber supply and demand has fueled an ongoing price escalation, with the Random Length Lumber Price Index increasing by more than 60% from late 2011 to March 2013. At the producer level, prices for Douglas fir sawlogs reached a five-year high in late 2012, according to Craig Rawlings of Forest Business Network in Missoula, Mont., and have continued upward during the first quarter of this year.

One reason for the shortage is that lumber companies are still nursing a hangover from the housing crash. “With the severe declines in housing over the past years, many building material manufacturers cut back production dramatically,” said NAHB chief economist David Crowe in February. But even with demand improving, tight credit has hampered producers’ ability to reopen plants quickly enough.

In fact, most industry observers think that prices will continue to go up in the short term, and some believe the trend will last longer, with supply and demand requiring several years to balance out and prices rising to unheard of highs during the interim. “In 2004, prices for Western SPF#2 and better hit $394, a record at the time,” says Russell Taylor, president of the International Wood Markets Group in Vancouver, B.C. “I believe the average for this year will be around $400, and some people are predicting spikes of up to $600 during the next four years.”

The upward trend will certainly include seasonal variations. Matt Layman, the Charlotte, N.C.-based publisher of Layman’s Lumber & Panel Guide, predicts that the current supply squeeze that started in April will continue at least another month, leading to record high prices by the end of May, and maybe into June. His advice? “If you have a job sold for delivery [in the next few months], buy it now. This is not a market to gamble on the short side.”

The longer-term situation depends on whether the housing recovery continues, and there’s no agreement on that. Forecasts have been for as many as 900,000 to 1.5 million units next year, but some say that’s overly optimistic. Layman, for one, thinks it’s a temporary situation driven by pent-up demand from first-time buyers. “We are not in a sustained housing recovery, but rather a bounce off the bottom after the contraction. Watch how quickly U.S. housing becomes adequately supplied in less than a year,” he says.

But even if housing cools, it’s not the only factor affecting supply. Rawlings, for instance, is one of the leading proponents of the “super cycle” thesis. Its main point is that lumber availability and pricing over the next few years will be driven as much by global as by domestic factors.

These factors include: permanent supply reductions—the loss of exports from Russia, the devastation of forests in the Northwest by mountain pine beetles, and harvest reductions ordered by the governments of Quebec and Ontario—ownership of more timberlands by investment organizations that are more focused on maximizing profits than on supplying mills; and increasing global demand for lumber in China, India, and other countries. Rawlings believes that production will require at least five years to catch up.

“Supply and demand will always balance eventually, but we are moving into a different dynamic that will see more volatility as supply chases rising global demand. I’ve been [following this industry] for 40 years and never seen bigger supply/demand gap.” He believes that a fall in U.S. housing starts will only delay the super cycle another year or so.

Although there’s little dealers can do about global timber markets, it’s clear that the financial wherewithal to replenish lumber stocks during seasonal lulls will be more important than ever in the next few years. “You need enough of a credit line for two months of lumber,” says Layman.

The problem is that volatile prices will make credit a continuing challenge. “Bankers are still very leery, and are going to frown on anything that even looks like a potential surprise,” says Gary Vitale, president of the North American Wholesale Lumber Association in Rolling Meadows, Ill. He says that dealers, dealer associations, and wholesalers need to work together to actively cultivate lenders. He also says that dealer groups that have done so have seen banks more willing to work with them. “Some of our members have developed close relationships with their banks and some of these banks have taken the time to learn about our industry.” It may be the only way to ensure the credit needed to weather this potentially lengthy storm.