You’d think that a robust increase in housing starts would lead dealers to increase the volume of products on their shelves. Instead, tighter credit, scaled-back wood-product production, and a drop in the number of available truck drivers has put the entire supply chain in limbo.
“No one wants to take any inventory position,” says Todd Hixson, lumber division manager at buying co-op Do it Best Corp. Hixson and others said short-term thinking still prevails among dealers, distributors, and mills as each waits for signs from the others that they can place bigger bets. There's little question among experts that a wood-products shortage is on the horizon—it's just a question of where along the supply chain the first shoe will drop.
One factor behind the caution is the recent memory of price run-ups in 2009 and 2010 based on starts gains that turned out to be propelled by tax credits. Once those gains started to fade, prices fell back to their old levels.
“That’ll adjust your buying practices really quickly,” Hixson says.
But this year’s growth appears to be real, analysts say. Housing starts are up (they grew 21% in July from a year earlier), spending on new-home construction has increased (at a rate of 12.1% in June over the same month last year), and the leading remodeling index from the Joint Center for Housing Studies at Harvard University expects a 12.2% growth in the annual spending rate by early 2013.
Some dealers who might normally respond to these increases by buying more are hamstrung by their credit lines, many of which were reduced by lenders as housing crashed. “Banks are interested in one thing, and it’s cash flow,” says Gary Vitale, president at the North American Wholesale Lumber Association in Rolling Meadows, Ill. “Since this is typically a cyclical business, banks are still not looking at this industry very favorably.”
Even if banks loosen up, production levels could remain artificially low for months as mills seek to maximize revenues while they pick the right moment to expand. Pretend, for a moment, the mills that shuttered or mothballed during the downturn are currently open. That would put demand for products such as OSB and plywood at about 50% to 60% of operating capacity, with lumber at about 77%, estimates Bob Berg, principal lumber economist at forest products market research firm RISI International. But given that many of those mills won’t reopen, particularly those that produce plywood, the figures threaten a more volatile situation. OSB mills open now are facing demand that’s 101% of operating capacity and plywood production is being pushed to 105% of operating capacity during peak months.
“The biggest issue facing the industry going forward is how many of the closed mills are going to start up again and how many will remain closed,” Berg says.
The rates themselves are more a sign of the times than an issue of raw-material shortages or too few mills. “The industry has been really judicious in terms of controlling production,” Berg says. He expects North American demand for materials such as OSB, plywood, and softwood framing lumber to grow 5% to 6% next year, back to mills’ 2008 production levels. Prices also will rise, he predicts.
Such growth should enable wood-product manufacturers to build on recent bottom-line gains. A quick sweep through timber companies’ second-quarter earnings reports finds sales growth upwards of 15% from year-earlier levels, with the larger players’ revenues nearing or clearing 30%. They’re all crediting higher prices and increased volumes.
Whether manufacturers will scale up operations could be determined as early as this spring, Vitale says. In recent years, dealers have engaged in what Berg calls “rapid-fire buying”—a recessionary habit of placing smaller orders at a higher frequency. But if dealers become confident that business will continue to rise in 2013, it will be both desirable and necessary to increase inventories. Their orders in turn should give mill operators the tip-off they’ve been waiting for to boost capacity. But even when that happens, it’s going to take mills several months to turn on the lights at mothballed plants, experts say. As a result, temporary product shortages will be likely.
The word, so far, is that vendors are (and likely will continue to be) able to fulfill contracts with suppliers and dealers. Hixson says his company’s emphasis on reloading is making its relationships with product producers valuable as availability tightens on the spot market.
“We’ve already seen it happen with the vendors we contract with,” he says. “What wood they have available they take to companies that contract with them.”
In the meantime, a shortage of truck drivers is thwarting efforts to move product faster at all ends of the supply chain. Rob Suarez, a research assistant at the American Trucking Association in Arlington, Va., explains that a pre-recession driver shortage has returned in tandem with industry growth, putting the driver deficit in the “tens of thousands.”
It’s posing an issue for dealers that don’t own their fleets.
“We are witnessing a reluctance among trucking companies to add units,” says Howard Moser, operations manager with Do it Best’s freight management services division. “Even though they are seeing increased demand from their customers, they’re not adding more trucks.”
Nationwide, it’s taking two to three days to get a load picked up, Moser says, about 15% to 20% longer than usual. In the southern states, the wait is double what it’s been, averaging four to seven days to get the load.
“It’s just the tip of it right now,” says Larry Adams, president of the Southern Building Material Association in Charlotte, N.C., adding that the tight supply is pushing up commercial drivers’ hourly rates to between $15 and $18 in his members’ markets. And with dealers reluctant to build up inventory until the housing market’s recovery turns consistent growth, the added cost has the potential to reverse the past gains made by placing smaller orders more frequently. “Guys are still very cautious of moving and just not willing to take any chances with inventory.”
Moser says the buying co-op is sourcing materials from more locations and looking at other brands. But dealers’ current practice of relying on distributors for quick delivery in lieu of stocking their own shelves is making prompt shipment paramount, even if it comes at a slightly higher price.
“It’s slowing down the supply chain and costing more, but it’s not impacting the amount of material that [members] buy,” Moser says.