April 2020 Whole House Commodity Index
By Don Magruder, CEO of RoMac Building Supply
The RoMac Building Supply Whole House Commodity Index (Index) for mid-April declined 3.1 percent to $33,024 as the shutdown of the American economy weighed heavily on the wood commodity markets. Last month, I cautioned about a short-term deflationary impact on the market, which we have seen. I also suggested mill and manufacturing curtailments could impede a wholesale decline.
Here are some contradictory points about this Index and market that builders should consider and understand as they bid upcoming projects:
- First and foremost, this Index is based on wholesale and mill pricing as of April 13th to 15th, and this is used to forecast pricing in the next 30 days. Local dealers have inventory on the ground, which could be higher or lower each month versus this Index.
- While the Index dropped 3.1 percent over the last 30 days, it is still 0.1 percent higher than January 2020. However, as compared to a year ago (April 2019), this Index is 1.2 percent lower. Despite the collapse of the economy, because curtailments and inventories were waning in advance, the markets did not collapse as many people thought. This was a surprise to me.
- It appears many of the wood markets are close to a bottom. Take dimensional 2×4 spruce and 2×6 spruce, for example. Cost month-over-month is 13.2 to 16.7 percent down in the Index; however, in the last two weeks these items have added back almost $50 per thousand. Because of the COVID-19 (coronavirus disease) outbreak, massive mill shutdowns and curtailments in Canada are causing a lot of concern and supply is starting to become a major issue, especially regarding specified lengths in studs.
- Because of the shutdowns and curtailments, the lumber commodity futures markets have gone for a low of $259.80 per thousand on April 1, 2020 to $331 on April 14, 2020. That is a 27.4 percent increase, which suggests much higher pricing.
- The big concern is that the secondary markets have been drained of a lot of inventory because of the downward pricing over the last 30 days. Plus, many companies having to manage cash flow caused by the economic turndown by purchasing only what they need has become of utmost importance. This reliance on secondary markets coupled with the curtailments in production are a recipe for shortages and higher pricing.
- The other concern involves how the federal government has rolled out the stimulus package. From other businesspeople I have spoken with, there is a real concern that this package will discourage people going back to work. This could exacerbate the issues with production and manufacturing on the jobsite.
- Daily, manufacturers are announcing plant closings and/or significant cuts in production because of COVID-19 (coronavirus disease) related issues regarding labor and social distancing. Here are just a few of the supply areas:
- Interior doors will be a problem because of reduced manufacturing and industry systemic issues of under capacity as well as competitive issues. Interior doors are on allocation with allotments as low as 50 percent of the prior year’s sales. In some cases, lead times are expanding out to 8-10 weeks. There are few alternatives and little chance of an import option.
- It has been announced that Mexico is stopping a lot of its manufacturing because of COVID-19 (coronavirus disease). This morning, we were notified that the Kwikset and Schlage facilities in Mexico were shuttered. Plus, there are many other items in which parts from China are shipped to Mexico for assembling for America. The delays in China along with the circumstances in Mexico could create some real issues.
- Lead times for windows, especially special orders, are expanding. One manufacturer in Florida of patio doors is 10 weeks out right now.
- Masonry accessories and nails are forecast to be in short supply as there was a huge gap in production in China. A supplier notified us that containers expected last November are still months away from arriving.
- Tariff issues on mouldings from China and South America along with decreased production due to COVID-19 (coronavirus disease) have resulted in a 20 percent price increase forecast for May as well as potential shortages. Getting products and the uncertainty of the delivered price because of tariffs have heightened concerns for supply this summer.
- CDX plywood is probably at a bottom, or close, in pricing. However, the long-term issues with countervailing tariffs on imports along with a lawsuit by American manufacturers regarding certification could create much higher pricing and shortages even in a slower housing market.
The bottom line is that manufacturers are not going to remain open to lose money. The bad memories of the Great Recession from 12 years ago, lack of cash, and demands of the COVID-19 (coronavirus disease) will force closures and curtailments. The rebound by the spruce markets is not because of an optimistic demand equation, but rather a realization that supply could be an issue.
All this being said, here are the notable price movers in this month’s Index:
- Spruce studs were down only 8.2 percent off their low from earlier in the month as traders began to grow more concerned about supply. Overall, the spruce markets are in a very tenuous position.
- CDX pine plywood dropped 23.4 percent while OSB sheathing gave back 34.9 percent. CDX is probably closer to a bottom and could have some supply issues.
- Dimensional pine dropped in price from 12.9 percent to 14.4 percent, depending on width and length. Curtailments and a correlating bottom with spruce is probably closer than we think.
- Trusses went down 2.1 percent on lower pine pricing.
- Colonial casing was up 7.4 percent on the first wave of increased pricing from mills.
- Engineered wood beams gave back 9.6 percent on lower raw material costs.
If I were a builder right now, my main concern would be supply—it would not be pricing. Delays because of supply issues could be very detrimental in a time wherein building projects to turn cash is imperative. It is important that doors, windows, and other components are ordered timely to prevent a slowdown on jobsites and production. The old paradigm of deliveries of these products in two weeks could be resetting to 4-8 weeks.
According to a couple of sources, out-of-work framing crews from the north are heading to Florida for work. As a result, many builders may have an opportunity to speed up projects. That would be a good thing considering the current deflation, but it would be all for nothing if supplies are not secured. Now is the time to work closely with your suppliers.
If these shutdowns and curtailments persist for another month, expect more supply disruptions and higher costs.
Please be safe by staying home if you are sick, socially distancing, cleaning high-touch areas, washing your hands, and refraining from touching your face. Together, we can get through this.
The RoMac Building Supply Whole House Commodity Index is based on wholesale costs of the base components to build a 2,200-square foot wood frame home with a concrete stem wall in Central Florida. The Index includes foundation, metal, concrete, block, stucco, cement, wood framing, siding, sheathings, trusses, roofing, drywall, insulation, windows, doors, trim, garage doors, and most building hardware. It does not include décor, electrical, plumbing, mechanical, landscaping, or labor. Because the Index uses current wholesale costs, this should be a strong indicator of the direction of building prices for the next 30-45 days.
Don Magruder is the Chief Executive Officer of RoMac Building Supply in Central Florida. Go to romacfl.com to sign-up for the Index and other free market reports. To sign up for this information via email, contact Rebecca Ballash. For great videos and Don’s weekly column, go to www.AroundTheHouse.Tv to subscribe to our YouTube channel and weekly updates.