Lumber: Now In Glut
It is interesting how things change. Earlier in the year, people were pointing to lumber as evidence of inflation. They said that all the money printing was causing prices to go higher.
On the open market, the price went bananas. It shot up to near $1,700 per 1,000 board feet. This was, by far, an all time high.
Of course, markets are strange animals, often not telling a realistic story. After touching the peak level, something interesting happened.
The price of lumber since crashed. In the last 3 months it gave back more than $1,100. This is a wild ride for traders but is instilling havoc on the retail market.
Supply Chain Disruption
There was a global shutdown last year due to the pandemic. This set of a series of events that left to the massive run up in prices. However, there is always a price to pay since there are many dynamic issues always in play. This is a point the inflationists tend to miss. They look at simple stimulus-response which is showing to be incorrect over the last 30 years.
Lumber, like everything else, was in short supply as we rolled out of the lockdowns and things opened up. This industry was hit especially hard since it was one of the areas that kept going during the lockdowns. People decided to engage in remodeling jobs. This coupled with the ongoing construction led to a need for lumber.
Since the mills were running behind, lumber yards did not want to be caught without supply. Hence they ordered whatever they could. This is something that we could be seeing across many industries.
Nevertheless, the idea was that there was a huge demand that would continue. As mills reopened, lumber was pumped out and yards filled up with stock. The prices were up but that didn't matter since people were buying.
Unfortunately, the solution for high prices is often high prices.
As people found out their home improvement jobs became too expensive, they stopped. Also, those that completed their improvements were not in the market again. Finally, there is a possible slowdown in housing.
Lumber Yards Sitting On Excess Inventory
There is now a glut of lumber at the retail level. This is something that stands to reason given the factors just mentioned. Also, the lumber that is there is at a higher price. The collapse in wholesale prices means new lumber can be purchased cheaper than what is in the yards. Companies are now tasked with trying to unload the lumber, possibly at a loss.
According to Bloomberg:
In July, 49% of building-material dealers and manufacturers said they had excess lumber capacity, while none described their levels as “very tight,” in a survey by John Burns Real Estate Consulting LLC. Back in April, 40% said their wood inventories were “very tight.”
That is a big turnaround in just 3 months. This shows us how quickly the supply/demand equation can flip.
For lumber, it is already taking place.
People are reporting they are starting to see prices in some of the different pieces dropping a lot. Pressure treated lumber along with plywood are collapsing in price. Of course, the drop is not moving as quickly as the market since there is still higher priced lumber in the yards.
Is There A Wider Issue
There is no reason to believe that this situation is limited to lumber. Getting the supply/demand equation is very difficult. Most everything saw supply chain disruption.
One of the challenges is that everyone reacted in the same manner. As retailers found themselves without inventory, they scrambled to make sure they had product. This is only natural since they did not want to lose sales.
Of course, this mean placing orders for whatever they could put their hands upon. As supply chains get back in order, products will start hitting the shelves.
The question for them, also, is whether the demand will be there. This is especially true for durable goods which held up fairly well during the lockdowns. Like lumber, people were purchasing as they were spending money in this area as opposed to on services.
What resulted is a number of years worth of demand was pulled forward. We are going to see those people who decided to engage in major purchases removed from the market for a while. This means that the supply buildup could result in a glut if demand wanes
The problem is that the latest University of Michigan Consumer Survey was very disappointing. For August, the preliminary numbers saw a sharp drop meaning that those questioned are less optimistic about things economically than they were a month ago.
This is one the barometers that many money managers and economists look at. With this survey, if it continues this trend, it will make for troubled economic waters.
We will have to see how this all pans out. However, we could see a duplicate of the lumber situation in other industries.
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