For two decades, Wickes Lumber's vice president of purchasing John Bavester has watched commodities pricing and supply erupt and subside. So he can be philosophical about recent swings in structural panels. “You take what the market gives you,” he says. Wickes, based in Vernon Hills, Ill., smoothes out any volatility by buying commodities based on its 48 yards' four-week rolling average of supply. Bavester notes, however, that dealers invite trouble when they extend quotes to customers beyond 30 days while market prices are in flux. “You need to price for the risk you are willing to accept,” he says.
Managing risk is always a challenge for pro dealers, especially those who think they can outsmart the market by waiting it out. But dealers can't stop buying forever, and the factors that last year led to shortages and price spikes for plywood and OSB still linger: APA-The Engineered Wood Association estimates that North American panel output will be flat in 2004 at 40.9 billion square feet. Yet residential construction, which consumes more than half of that production, may equal or surpass the outstanding performance of 2003, according to NAHB predictions in March.
“Demand will be very good, and in the long run there will be enough product,” predicts Rick Schaberg, commodities purchasing manager for Lansing, Mich.–based wholesaler Schultz, Snyder & Steele, which in mid-March had only a two-week supply of OSB—$2 million—and about one-quarter of that amount of plywood. Harold Stanton, vice president of OSB for Louisiana Pacific, agrees that demand will be met “one way or the other.” But dealers should brace themselves for longer lead times and higher prices. “We may look back and say today was a bargain,” he stated.
Still, market stabilization is inevitable—“gravity exists,” says Bavester—and could happen sooner rather than later if interest rates rise and cause home sales to decelerate. Panel availability should ease with the influx of more imports—which the APA estimates captured 2.3 percent of the North American demand last year—and the scheduled activation of three OSB plants over the next several months.
While the dust settles, contractors have been switching to less-expensive substitutes like asphalt-impregnated sheathing. And more pro dealers are locking in OSB and plywood supply through contracts—just as large retailers regularly do to guarantee steady shipments—and accepting the risk that these arrangements can backfire if prices fall. “If they want wood now, they have to stand up and commit to it,” observes Sam Sherrill, executive editor of Crow's, a Portland, Ore.–based forest products newsletter.
The Building Center, which has five yards in North Carolina, currently contracts 85 percent of its panel purchases, compared to 50 percent in past years, says its president, Skip Norris. Lampert Yards recently negotiated contracts as far out as the third quarter for some of its 37 locations in the upper Midwest, says commodities buyer Jon Wigen. Do it Best is urging its dealer-members to contract 30 to 50 percent of their panel needs, says the co-op's vice president of lumber and building materials, Quent Ondricek.
“We have to do business—we can't just pull back—and we do buy on contract for the full year,” said Bill Wernecke Jr., president of two-yard Cedarburg Lumber in Cedarburg, Wis. “We made the assumption last year that we'd be able to go into the market to fulfill our obligations, and got caught with our pants down. We won't make that same mistake again.”