Being a purchasing agent/operations manager for the last five years, I have seen high lumber prices and high demand, low lumber prices and high demand, and, in the last two-plus years, really low lumber prices and extremely low demand. But now we are edging into some territory that is not as familiar: high lumber prices and continuing low demand. That's a seeming paradox. What could keep lumber prices rising in a market that for all intents and purposes is still relatively lifeless? The answer is that it's due to a number of factors; some planned and some unplanned.
A recent article by Don Magruder, a veteran LBM manager in Florida, talked about the confluence of these different factors and how they could lead to even more businesses going under as they get caught in the pinch of an eroding supply chain and the demand for material from their customer base. I think Don hit on many good points, and the scenario he paints could come to pass if all the bad things he points out come true. He mentions the shuttering of many mills, the reduction of available trucks to ship material, and the loss of many employees from the skilled labor pool that are needed to get production going again.
These are valid points and the main reason for the pricing hikes we are experiencing right now. But now that we recognize the problem, we need to have a strategy for getting through this and not becoming another statistic on the dead LBM dealer list.
What's the Connection?
I found myself caught up in this game of trying to find reason in the ever-changing scenery of lumber pricing and have come to a conclusion: The price of lumber has no bearing on the condition of the housing market! New construction is at a standstill compared to any time in the last 25 years or more and lumber prices are going up every day. OSB is almost at $300! What is going on?
Here's my take: we have had two straight years of oversupply and no demand. That has driven the price of wood to its knees, with everyone in the supply chain realizing that the only way to get higher prices at the mill would be for the supply side to more closely match the demand side. Well, that has happened, and it has happened with a vengeance. Mill level pricing has skyrocketed, trucking is scarce, and retail yards are being faced with two problems: 1) trying to get material in a timely manner; and 2) trying to get it at a good price. One of these problems is realistic and one isn't.
I contend that we need to focus on getting material in a timely manner and stop letting the cost of materials drive how we buy.
Hold That Throttle Steady
Three years ago, we could buy a little high and not worry about it because business was booming and we could turn our inventory fast enough to move out the high-cost stock. Most of us don't have that luxury today. A truckload of lumber that used to last two weeks may be here for two months now. So how do we deal with problem No. 2? I say: keep doing business as usual.
We have all been in a just-in-time buying mode for at least two years now and it has put us to sleep. Supply was always available and pricing was rock-bottom. Purchasing was pretty easy. Now, all of a sudden the price of lumber starts to climb with no end in sight and we are rudely awakened from our comfortable chair and forced to start thinking again. We start reading industry articles, trying to get up to speed on what's going on and get some insight as to what to do.
All this leaves us looking like the Mad Hatter from Alice in Wonderland. Do we buy ahead? Do we hold out and wait for it to turn around? Oh my!
Calm down. I say we shouldn't change a thing we are doing. Don't let the current move by the mills get you flustered and force you to try and out-think Random Lengths. Just in time purchasing is how you will make it through these pricy times.
Yes, you may get caught in a bind if shipping schedules get tight, but if you continue buying what you need, as you need it, you won't get caught with three trucks of overpriced material when this market settles down and corrects. Even though there is a shortage of mills, material and truckers right now, that will end as real demand takes over. Right now, there is no real demand. All pricing issues are being driven on the supply side. It can only last so long.
Buy what you need, and don't over-buy. Hold the course. Keep it steady.
Wally Roderick is operations and purchasing manager of Appalachian Supply in Ellijay, Ga. E-mail him at firstname.lastname@example.org.