A term I have coined and used over the last year is "supply chain destruction," and it appears many in the industry are just now realizing it's real. My concern is the destruction process is far from over, based on the depletion of retained earnings and the inability to secure adequate lines of capital. The inability by many companies to show a profit based on reduced levels of business and overwhelmingly bad debt further hampers any chances of securing the capital required to go further. Because of these reasons, I believe the bloodletting in the industry is far from over and the next nine months will be tough.
The last two major recessions of our generation occurred in 1982 and 1991, and housing starts during both remained above the 940,000 mark. It appears 2010 could be year three in which housing starts end far less than the previous two recessions. The interest rate for an average 30-year fixed mortgage was 16.04% in 1982; 9.25% in 1991; and today, it's 5.1%. The problem in the previous two recessions was the cost of money, while today you can get money. That's why so many people are getting wiped out. In the other recessions, companies would reduce spending to cover the higher cost of money and hang on for dear life, but businesses today have no opportunity to do this.
A few weeks ago, I spoke with an executive at a major distribution company and he said customers were asking him, "Why don't manufacturers re-fire the mills and put the loggers back in the woods, since there is a spike of demand?" His answer was short and to the point: "They're gone." The small companies that owned the trucks and saws to pull logs out of the forest are no longer in business. Many of their trucks are on the auction block. The second and third shifts at the mills are gone, leaving many companies unwilling to ramp up production for a blip in business. In fact, what real motivation would any company have to crank up production if prices are still below profitable levels? A comfortable long-term profit level must be reached by these companies to crank up production, especially given the odious layoff rules the government has imposed, not to mention the future health care debacle.
Look at your own operation right now. Many of us have reduced staffs by 50%, or greater, for a long period of time. Have you tried to call any of these people back? For us at Ro-Mac Lumber, many of these folks have secured jobs in other fields or moved away. They're gone. Most people in our industry haven't come to grips with the absolute brain drain that has occurred over the last three years. Understand, I'm not talking about warehouse people that are no longer employed; I'm talking about senior managers, top-notch support people, experienced department heads, and qualified salespeople.
Because cash is, indeed, king and capital is so tight, inventories on all levels are being held extremely low. Many dealers have decided the right strategy for them is to follow the market's ups and downs. Do you blame them? Unless you have a crystal ball, based on lack of confidence being sent from Washington, you'd have to be out of your mind to load the wagon now. This only exacerbates the "they're gone" situation in the supply chain.
This same scenario is how Ro-Mac Lumber & Supply came into existence. After the Great Depression and World War II Buck Robuck and his brother founded the company with the McDonald family based on assurances they could get lumber from Buck's brother-in-law, who ran Foley Lumber Co. Between the depression, the war, and the housing boom from returning soldiers, lumber was in short supply and was being rationed by the government. Buck's ability to buy lumber is how this company started.
Most will not see how bad the building material supply chain truly is until housing starts to kick back up to the 600,000-plus range or a bad tornado season or major hurricane hits. Then, hold on Nelly, prices will skyrocket and supplies will be tighter than a bottle of whiskey at an AA meeting. Your builders will complain and demand, but not much can be done, and for you dealers, other than building great relationships and loyalty with your primary vendors, not much can be done either. Trying to buy a six-month supply of building materials at a price which could crater in three months because of something done in Washington makes no sense in light of the capital issues. Dealers should spread the message to builders to watch out for long-term quotes and make sure they are aware of the precarious situation the supply chain is in.
Supply chain destruction is not a problem that will correct itself in three months or even in three years, because it's still occurring. Until real confidence is restored at all levels and until housing starts show signs of a consistent million units per year, don't expect much investment in this industry. Can you imagine going to a bank in Florida today and saying, "Hey, I'd like to borrow $5 million to start up a lumberyard."The next thing you know, security guards would be ushering you out the door.
The bottom line is this. Supply chain destruction is real. Those who try to outsmart it will probably become another one of its victims.
Don Magruder is a former Chairman of the Board for the Florida Building Material Association and is currently the vice president and general manager of Ro-Mac Lumber & Supply in central Florida. This column originally appeared in the April 1 FBMA newsletter.
