Looking Around the Corner
LEST WE NOT FORGET... the current lumber market condition is the by-product of a major disruption, not a lasting trend. The disruption consists of the following.
- Accelerated millennial transition from urban to suburban areas. This has created another “first ever”...9–12 month new home order file. Builders have encouraged suppliers to have supply available at any price. In effect, builders have short sold their own product and enticed suppliers to play along with them. Builders have historically large order files and suppliers have like-sized inventory to accommodate builder intentions.
- Disproportionate dependence millennials, who are totally dependent on a 3% interest rate. This demographic has enjoyed a pain-free economic adulthood. They proceed fearlessly with no marker of what is too much.
- The Fed’s dependency on low interest rates to finance U.S. debt and its continued supply of liquidity to business and consumers, ignoring inflation. Housing is the primary driver of the U.S. economy. Inflation in every aspect of the housing sector, combined with rising mortgage rates, undermines housing’s ability to bear its burden of economic pillar.
- 10 million:
- citizens are unemployed.
- home owners are behind on mortgages and are under-employed. Foreclosures on an epic scale are lying in the weeds.
- renters are delinquent on rent facing eviction.
There is new found supply panic in the lumber market based upon housing permits, resulting excessive inventory positions. Production will rise as COVID falls. There is a bear lumber market hatching.
3-Week Order Files Exposed
Do you wonder why 3-week mill order files evaporate overnight or in one week. For the purpose of explanation consider the following example.
Producers have a good handle on what they will make over the next two weeks. As a general rule, beyond two weeks, the certainty of output exponentially decreases. I have been told that week #3 has a 30–40% margin of unpredictability. So, let’s just stop there and begin with no order file and no floor stock.
Week #1, mill sells 135% of production. Ends the week with a 2-day order file, quoting one week or sooner.
Week #2, two days sold, mill sells 135% of the 65% available. Mill has 5-day order file the beginning of week #3, quoting 2-weeks or sooner with one week order file.
Week #3, mill sells 135% of production which extends order file to 10 days, quoting 2–3 weeks shipment.
Week #4, mill sells only 60% of production (getting into third week of uncertainty, effectively losing 2 days of order file, although still quoting 3-week shipment.
Week #5, mill again sells only 60% of production to create illusion of order file, buyers continue to commit 2–3 week shipments against one week order file.
Week #6, mill sells 60% of production to keep shipments at 2–3weeks. Shipments start coming early.
Week #7, mill has noticeable increase of prompt loadings and only a few days order file on a few days items...still quoting 2-week shipment.
Week #8, no order file and prompt shipment. 2–3 week order file vanished.
Disruptions and emotions affect the cycle length. Like this one: shorter cycle with higher degree of emotion and fear of supply.
Next we see more quick wood and early shipments.
Looking Forward...ML
A veteran lumberman, Matt Layman publishes Layman’s Lumber Guide, the weekly forecasts and buying advisories that help component manufacturers save money on lumber purchases every day. You can reach Matt at 336-516-6684 or matt@laymansguide.info.