February 2013 Lumber and Commodity Report



by Don Magruder, CEO of RoMac Building Supply

Your Home Builders Association Wood Commodity Index (Index) increased 4.5% to $439.98 per thousand driven primarily by strength in the sheathing market. What makes the February increase significant is that it follows-up a whopping 11% increase in January, and this price weathered a brief ten day market correction during the beginning of February. Heavy overseas buying, improved domestic demand, and a fire at a Canadian OSB manufacturing facility are being blamed for the increase.

The 15.5% increase in the Index since mid-December is scary in itself, but the numbers become horrifying when compared to last February. Since last February, the Index has increased a mind-boggling 63.0% with lumber increasing 42.3% and sheathings up an unimaginable 81.3%. Based on our Index, an average piece of OSB or CDX sheathing has increased $203.79 per thousand or $6.52 per sheet. These numbers are very spooky considering the difficulty many builders are having in getting appraisals to qualify their homeowners for financing.

Over the last 30 days, the lumber portion of the Index only increased by 0.8% to $419.92, and this may suggest that buyers are growing weary with the pricing. A 42.3% increase in pricing since last year is hard to digest despite the overseas buying and increased demand.

The sheathing portion of the Index remains very strong on short supply, and the emotion from the Canadian OSB fire is still fresh in the minds of buyers. The sheathing portion increased 7.3% to $454.96 with OSB sheathings adding $34 per thousand and CDX pines pushing up $15-$25 per thousand. The cost numbers for sheathings are extremely high–approaching record levels, and there is a real concern as to how much farther this market can increase until it begins to kill its own demand.

Increased fuel costs are creating a bevy of price increases and added fuel charges across the supply chain. Door companies have announced 5%-6% increases, mouldings are going up with some outages being reported, and shingle manufacturers have announced two price increases that will be implemented in the next three months. Special order items are becoming harder to get and stock orders are running much longer lead times as the supply chain is very lean.

Cash remains king and squeezed-down credit lines are creating tight inventories at all levels. Then there is the common sense factor–you don’t load the wagon when the market is at record high pricing. This is creating tight supply. In my view, the market is still overpriced and there exists a real downside risk; however, when and how remains to be seen. The brief market correction in early February looked as if prices were going to drop significantly, but the mills were not able to turn it around. My concern is these prices could be pricing many customers out of the market.

Those who hold long-term pricing are really getting hurt now, and this could mean the loss of more companies in the supply chain. Builders, you should have a price escalation clause in every contract, and it is in your best interest to monitor pricing extremely close. There are a lot of low bidders who were awarded projects a couple of months ago, and who may not survive these huge increases. Right now, the smartest people in the room may be those who lost bids in November and December because they were too high.

Don Magruder is the Chief Executive Officer of Ro-Mac Lumber & Supply, Inc. in Central Florida (romacfl.com), and he is a former President of the Southeast Mississippi Home Builders Association, and past Associate Vice President of the Home Builders Association of Lake County. To contact Magruder, email him at don.magruder@romaclumber.com.