What we can learn from the spiking, and tumbling, price of lumber

Triple-digit percentage price rises and falls have created a wild ride for timber in 2020 and 2021 that illustrate why supply chains need to be prepared for more swings in raw materials in the future

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Supply chain executives have long had to try to manage a complex dance between supply and demand. However, with unforeseen lockdowns, changing consumer habits and freight challenges, this tough task becomes all the more intricate. Product shortages have come and gone with lockdowns - from toilet paper, to chlorine, to semiconductor chips - but few have shown the complexity of the supply & demand balance quite as clearly as the lumber shortage.

Spending more time at home, low mortgage rates, and government incentives for the housing market in multiple countries, have driven demand for renovations and new homes. The construction and lumber industries have boomed as a result. However, now prices are tumbling back down and a new fluctuation in the market is having to be navigated. So, what can we learn from this prime example of rising and falling supply and demand?

Increased demand, and lower supply

After the Great Recession of 2008-2009 and the subsequent impact on the housing market, 30 large sawmills in the US closed. The huge impact of that recession loomed large again in early 2020 as forecasts became ever more dire. Expecting a repeat, sawmill owners slowed down in 2020 and many saw closures during the initial lockdowns.

Furthermore, during the Covid-19 pandemic, health and safety concerns about mill and construction workers reduced output. This contributed to a growing labour shortage, adding to the supply chain difficulties plaguing the lumber industry. Mills struggled to attract new workers, and according to the Bureau of Labour Statistics, mill employment fell by over 2,000 jobs between May 2019 and May 2020, just as pandemic closures were beginning.

Critically though those owners had completely misread market conditions, vastly undershooting demand as an entirely different dynamic emerged in 2020.

Covid-19 lockdowns provided consumers with a lot of time to stare at their own four walls – hence, a race for home improvements. In addition, many felt a need for change and looked to leave big cities, with the housing industry responding to the growing demand by building new homes at a startling rate.

Lumber prices in early May rose to more than $1,600 per thousand board feet while the cost of raw lumber grew by up to 350%. This added an average of $36,000 to new single-family home prices in the US

Additional incentives powered the market to new highs, as ‘do-it-yourselfers’ in the US spent their stimulus cheques, and new buyers in the UK used their stamp-duty holiday cash to do up their new homes. Lumber demand sky-rocketed.

Timber growers could provide the raw materials, experiencing a surplus through 2020, but sawmills were unable to cope. The tariffs on Canadian lumber introduced in 2017 added to costs.

Prices reacted rapidly, with the fastest rise since the post-World War II housing boom. Lumber prices in early May rose to more than $1,600 per thousand board feet while the cost of raw lumber grew by up to 350%. This added an average of $36,000 to new single-family home prices in the US.

On top of heightened demand, it should also be noted that many modes of freight transport are currently considered to be vulnerable for different reasons, and the impact of this is troubling. Shipping containers are at an all-time high price, and truck availability is limited because of a driver shortage.

Why have the prices suddenly dropped?

Mills have now restarted and, due to the rising demand, have ramped up production, with the 3,000 sawmills in the US now operating at full capacity. With this opportunity to sell at such high prices, increased production is to be expected – but the rising quantities mean prices are now down more than 65% from their peak, dropping below $1,000 in July, for the first time in months.

The price of lumber is still higher than average (previously, prices averaged under $400 per thousand board feet between 2009 and 2019) and are still at the far higher rate of around $600 per thousand board feet currently.

The professional homebuilding industry, particularly in the US, has reacted to these hiked prices this time by decelerating growth. The high lumber and wood prices are a major reason for the pause in construction. As the largest source of demand for lumber, homebuilding suppliers will be most affected, though demand is still high. Individual consumers have also reacted to the heightened costs with a pause in demand, creating waves in supply and demand that manufacturers and supply chains have had to ride.

The reactions to the lumber shortage have been almost more interesting than the shortage itself. As consumers learned of the rising prices and purchasing slowed, people and businesses showed themselves willing to wait for a better deal – a sign of consumer sanity.

The pallet crisis

Despite falling prices in lumber, led by the consumer, prices of wooden pallets have continued to rise. Almost everything travels on a wooden shipping pallet, the demand for them being so great that US manufacturers produce almost a billion each year. As lockdowns ease and the economy begins to surge, coupled with reduced production by manufacturers during the pandemic, demand is far outstripping supply.

Prices of pallets have doubled over the last year

The drive in demand has caused not just a serious strain on the pallet manufacturers but a worldwide shortage impacting most participants in the global supply chain. Prices of pallets have doubled over the last year. Even with makers having trouble keeping up with demand and lumber prices falling in June, pallet prices have continued to rise, with prices of pallets in July 2021 at 40% above the same time in 2020, and still rising by 5% from June 2021.

This has had an impact on the larger supply chain industry, particularly the FMCG market, with farmers suffering from rising prices in fertiliser, fuel and tractor parts alongside the pallet price boom. On top of this, a driver shortage is causing freight delays. Farmers have even been told by pallet suppliers that they won’t take new customers while they are unable to fill existing demand. In an industry where demand can’t slow down, supply chains are unable to shy away from these high prices.

Problems continue for the UK

UK lumber demand is a microcosm for how the ripples will continue to flow through timber and its related downstream industries, as well as how other disruptions will play in. Requirements for lumber remain high as the summer months bring a surge in building works, avoiding the inevitable bad weather later in the year. At the same time, essential maintenance on wood production facilities in European countries is shutting down sawmills. The market looks likely to tighten into Q3 2021 as Sweden, the UK’s main lumber supplier, is suffering from the lowest stock levels in 20 years, despite record production.

Supply problems are only being made worse by the new regulations slowing down transit between the UK and the rest of Europe, post-Brexit. The construction industry currently has fewer than 15,000 drivers. 30,000 HGV driver tests were postponed due to the Coronavirus pandemic. The UK relies on timber imports, leaving the supply chain and industry generally extremely vulnerable because of freight issues.

The supply and demand balance here means that almost all shipments to the UK have already been sold to customers. It is therefore likely that issues will still plague Q3, causing restraints on the construction industry – with many construction products still affected by limited availability, particularly as previously delayed projects begin.

Complexity plagues the supply chain industry, and these dramatic fluctuations in supply and demand create a most difficult problem to manage. Supply chains can learn resilience in the face of such intense variations in the market though.

The shortage has shown the importance of regular communication with suppliers and regular communications to clients, and how flexibility and forward planning are vital to ensuring a consistently operational business.

However, if the price rise and fall in the US has really taught us anything, it’s that consumers know their limits – buying frenzies wane and inflation in industries is unsustainable. You just need the resilience to be able to wait it out.  

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