Lumber prices and fiber availability are big factors affecting our business right now, and if you’re reading this, we’re betting they’re affecting you too. This is the elephant in the room that a lot of manufacturers don’t really want to talk about, but we think it’s important to be as transparent with our customers and prospects as possible.
So let’s talk prices first.
As you’re probably aware, we’ve talked about pricing a few times over the last year. We were even talking about it back in 2018, when the price of lumber was making records. Today’s lumber prices are even higher.
So how did we get here?
The short answer is that a lot of unprecedented things came together at the same time. In 2019, before the pandemic, lumber prices were stable. Unfortunately, COVID changed that. As you know, industries shut down and lockdowns took place all across the country. Among those shutdowns was new residential construction, which is responsible for the largest demand of southern yellow pine (SYP) here in the United States.
Then the DIY market killed supply, as we told you last summer. When new housing starts began to pick back up, there was very little supply to be had anywhere. As you would expect, prices went up considerably. Supply and demand have been completely out of sync since then, and it still isn’t getting any better.
To make matters worse, we use industrial lumber for our packaging and it’s what we offer to our manufacturing partners. In general, this is the wood that’s left over after all the best lumber has been removed from a log for building materials and furniture. It’s usually #4 grade, but we also occasionally use #3 grade. There is a lot less of that available right now, and that means that the price for industrial grade wood is through the roof.
So that brings up the availability of industrial lumber.
Why on earth are there so many industrial lumber shortages right now? It goes back to supply and demand again.
Fewer logs were sawn and processed through mills at the height of the pandemic. Mills closed, like a lot of businesses, because of both fear of getting sick and decreased demand. That created a significant decrease in all wood supplies. By the time that the mills started picking back up, their orders were backed up for months. Many mills still haven’t caught up.
Labor markets have not yet returned to normal throughout the country. Many mills are having difficulty filling jobs, which means slower production. Even loggers are feeling the labor crunch right now.
But that’s not the whole story.
The technology at the mills is getting better and better. Logs used to be processed manually, meaning that there used to be a lot more waste. People at the mill would take a look at a log, decide how to get the most high-quality cuts out of it, and then saw it up. That left considerably more lower grade wood for sale to the manufacturing industry.
Today, the mill industry has some amazing technology available. Logs are scanned and a computer makes the decision on how to cut it to get the most high-grade lumber out of it. Then the logs are precisely cut with a CNC machine.
Obviously, the mills make more per log when they get more #1 and #2 grade out of it, so they want to get as much high-grade lumber out of each log as possible. This new technology makes that possible, but it also limits the amount of #3 and #4 that’s available on the market.
Forest2Market also points out that the fires in the pacific northwest has caused shortages there that could be putting pressure on the southern states as well. In a weird twist that you probably haven’t thought about, fiber consumption is up in the paper industry as well. The surge in home deliveries and online shopping, not to mention the run on toilet paper last year, are to thank for that.
What’s the Outlook?
The honest truth is that no one knows for sure what to expect over the next few months. Uncertainty lurks throughout our economy, and the lumber industry is no exception. A second wave of lockdowns will certainly affect the market and have a compound affect on the labor market as well. That kind of scenario would also hurt the demand for housing and slow down wood production. It’s a vicious circle right now, and no one really knows what to expect.
On top of that, log production generally slows in the winter. It’s been a fairly mild winter so far, but when the snows hit, supply will tighten and that will put upward pressure on logs – which then puts upward pressure on lumber and industrial lumber.
At the moment, all of this uncertainty, along with a slow in construction and winter hitting, seems to have created a stall on market increases. The prices of construction grade materials seems to have stabilized. The prices are still very high, but they aren’t going up like they were.
Unfortunately, the prices for #3 and #4 haven’t stabilized yet. Supply is still extremely tight for lower grade wood, and pricing remains very strong. Many mills are not even taking any new orders right now, which is helping to keep prices elevated and supply tight. Our lumber buyers expect the pricing of industrial lumber to flatten out over the coming weeks (fingers crossed) but they don’t expect prices to go down yet.
On the bright side, Conner carries contracts with many mills across the country to make sure that we can acquire the inventory our customers need. We’re also buying up any additional inventory we can get our hands on to help bridge the gap until supply returns to normal.
Having said that, we are still getting hit hard on pricing, just like the rest of the country. We’ve had no choice but to pass some of those costs to our customers – that elephant in the room. We hate to do it, but we’re grateful that our partners understand.
We’re all hoping for an end to high prices and lack of availability soon.