Supply chain challenges part 3: Sharpening the saw to reduce lumber shortages
by Cal Evans and Brooke Blackwell, Synovus Credit Market Intelligence
The first installment in this series discussed the automobile manufacturing industry and the current problems associated by a lack of inputs necessary for production. The trucking industry shares some commonalities with auto manufacturing in terms of solutions but, as a vital cog in the supply chain, it suffers from a different supply issue altogether — labor. The focus of this article, the lumber industry, faces a wholly different challenge insofar as there is a large supply of inexpensive inputs in the form of timber, but very little ability to process the raw materials into the finished lumber. All three industries covered in this series have problems in common that underscore many of the current supply chain issues which impact our economy.
At the onset of the pandemic, sawmills were shuttered or production was throttled back. Workers were laid off because conventional wisdom called for lower lumber and building material demand. Few anticipated that a work-from-home environment would prompt millions to pursue home improvement projects funded in part by stimulus dollars. Historically low mortgage rates and relatively low job loss among homebuyers fueled demand for new construction, driving up home prices across the country.
Homeowners eager to sell in a hot market needed building materials to spruce up their homes before listing, and buyers also wanted to add on or renovate. These conditions created a wave of demand for lumber that quickly outstripped supply, sending lumber prices soaring. Incidentally, pricing for lumber and timber input barely budged because there is an abundance of the input, which was created in large part by a 1980s federal subsidy program that rewards farmers for replacing crops with trees.
The extent of the oversupply is shown in the map below (Figure 1) from FORISK Consulting of Athens, Georgia, which shows the Pine Growth to Drain Ratio for 2020. The growth-to-drain ratio represents how much timber is grown relative to that which is removed, and a ratio greater than 1 indicates an oversupply. The ratio for the Southeast is 1.31. So, whereas automakers lack inputs but have the capacity to produce finished products, the lumber industry is facing the exact opposite situation – plenty of inputs and limited means to convert them into lumber.
Source: FORISK Consulting
The recovery outlook is not as dire for the lumber industry as sawmill capacity has expanded over the past year. Eleven sawmill expansions or openings have been announced as of 3Q21, representing over 2,600 additional MMBF (million board feet) in additional supply. Futures contracts for softwood have responded with a drop from a high of $1,670/MBF (thousand board feet) to an August 26th contract price of $490/MBF (see Figure 2). This is still a good deal higher than the 2020 low point for the lumber contract price of $280/MBF.
A sawmill can be built or expanded far more quickly than a semiconductor plant, which is why the lumber market is correcting while car manufacturers continue to wait for more chips. Housing demand isn’t currently subsiding and while lumber prices may be stabilizing, the price of other materials like gypsum and concrete are rising due to other supply chain issues. Like other industries, all building material sectors are directly impacted by higher costs associated with lack of available trucks and drivers to move the lumber and other inputs.
Figure 2: Lumber Contract Prices
The lumber industry has an abundance of material inputs, but the means of production is constrained. However, the production issue is being remedied as more sawmills come online, as evidenced in futures prices for lumber. At the same time, other building material prices are escalating, which pushes normalization for total construction costs further into 2022.
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