Last quarter we discussed perseverance through the pandemic and how the construction industry has been a major economic bright spot for our country. While I feel we are still persevering, seemingly every day brings a new challenge. In the second quarter, we once again saw lumber establish new all-time highs, topping out at nearly four times higher than what they were in January 2020. Further, allocations on truss plates and shortages of critical fire-wall assembly materials hampered overall production. These challenges will persist near term; however, we believe we are seeing a self-induced industry leveling.
With most builders capping sales, we have seen new order demand level off. A byproduct of this needed and overdue metering of sales is a perception that demand is cooling off. Whether that is reality or not, what has become clear in recent weeks is our industry self-metering will give the supply chain a chance to “catch up” and costs to normalize. The steep decline in dimensional lumber pricing the past several weeks is a noteworthy example, but just one small piece of the puzzle.
More hurdles with lumber prices ahead
Specifically related to lumber, dimensional material has fallen off significantly and that is certainly a noteworthy development; however, sheet goods are still at the recently established all-time high. In a typical market, sheet goods account for approximately 35-40% of the value of the lumber in a home. In today’s climate with such a high-cost sheet goods account for roughly 60-65% of the lumber cost. To truly see the relief needed both dimensional and sheet good materials need to recede.
Related article: Lumber prices are falling fast turning hoarders into sellers
Lumber is one of many challenges
Lumber is just one component of the broader issue. Shipping issues and manufacturing delays remain prevalent in the industry. Everything from truss plates to windows, appliances, flooring, water heaters, etc. has all been affected by the supply chain delays. Furthermore, supplemental wages for unemployment have proved to be a higher wage for some than getting up and going to work. This has stopped the hiring process for our industry as well as many other industries. Further driving up labor costs, forcing employers to offer sign-on bonuses and expanded benefits. Intuitively, we all know that labor is a challenge our industry must solve. It appears COVID may have accelerated this issue.
Over the past year, and especially the past 6 months, I have had more conversations about lumber futures than ever before. What are lumber futures? Lumber futures are comprised of a few lumber and/or timber SKU’s for trading purposes only and do not represent a true market cost of goods.
As we look forward to lumber, it is our belief the volatility will continue. In today’s business world we have access to market inputs quicker than ever before. While information certainly proves valuable, it can also fuel fear and panic. The supply/demand curve is so fragile today that the slightest shift can drive commodity costs up or down rapidly. Consequently, procurement strategies need to shift to better position our business to have predictive costs.
A strong partner in tough times
We have seen the industry shift from 60 to 90-day pricing models to 30 days or less and even price-time-of-ship (PTS), this philosophy only exacerbates the problem creating additional panic. Longer-term pricing strategies are necessary and managed correctly will benefit the builder and supplier. In a volatile market, this requires better communication related to order demand from the builder to the supplier and transparent pricing models. The goal is to avoid paying cash market pricing, utilizing supply contracts as much as possible.
While we believe there is certainly a better way, know that we remain committed to doing everything necessary to support the business. We have taken numerous actions that are out of the ordinary to try and weather these storms – utilizing alternative materials, 3rd party freight, subbing out production, increasing wage rates, etc. Unfortunately, all of these actions come at a higher cost that in time get passed along to our customers. That said we remain diligent and investing in new technologies and equipment in the plant to help offset future costs. The goal remains to be an innovator and to push the industry forward and to be the best partner we can be, no matter the market conditions.
We see a great future for our industry. We continue to work diligently to persevere through these storms, side-by-side with our partners stronger and wiser than ever before.
Best,
RM
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Ryan Melin
President, Innovative Construction Group
