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 inven-tory position,” says Todd Hixson, lumber division manager at buying co-op Do it Best. Hixson and others says short-term thinking still prevails among dealers, distributors, and mills as each waits for signs from the others that they can place bigger bets.
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 grown (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 12.2% growth in the annual spending rate by early 2013.
Some dealers who might normally respond by buying more are hamstrung by their credit lines, many of which have been 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, Rolling Meadows, Ill.
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.
To understand why, pretend for a moment that the mills that shuttered or mothballed during the downturn were currently open. At today's demand for products such as OSB and plywood, these mills together would be running 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.
“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 industry has been really judicious in terms of controlling production. That judicious stance can be found in the fact that the OSB mills open now are facing demand equal to 101% of operating capacity, while plywood production is being pushed to 105% of operating capacity during peak months.
Current capacity rates are more a sign of the times than they are an issue of raw-material shortages or too few mills. North American mills in 2006 hit peak operating capacity at 28 billion board feet; production has since dropped to 19.9 billion board feet in 2011, Berg says. It’s going to take about $1.5 million to get a mill back up and running for every year it’s been down, he adds.
Berg 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.
“What wood [vendors] have available they take to the companies that contract with them,” he says.
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, 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 fleet management 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 southern states, the wait is double what it’s was, averaging four to seven days. Moser says Do it Best is sourcing materials from more locations and looking at other brands in response.
Dealers’ are continuing their practice of relying on distributors, even if it comes at a slightly higher price, Moser says. “It’s slowing down the supply chain and costing more, but it’s not impacting the amount of material that [members] buy.”
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