Volatile Lumber Prices in First Half Upset Distributor Profits

Supply constraints could hamper recovery in the housing market.
Angela

Several construction materials product categories in the second quarter saw more than double-digit increases from 2012, with the hardboard, particleboard and fiberboard category increasing 27 percent, according to the MDM Pricing Trends Report: Second Quarter 2013, which is based on the Bureau of Labor Statistics’ Producer Price Index.

Softwood and hardwood lumber saw pricing increases of 18 and 12 percent from the prior year, respectively.

The price increases could be driven in part by supply challenges. According to the National Lumber & Building Material Dealers Association, builder demand for some materials has outstripped supply. In the monthly National Association of Home Builders/Wells Fargo Housing Market Index, 22 percent of builders reported shortages in oriented strand board, followed by wall board (20 percent), framing lumber (18 percent) and plywood (18 percent).

According to the NLBMDA, most lumber dealers surveyed reported that the prices of the products they handle had increased an average of 10 percent or more over the past six months. But they do not appear to be passing that entire increase on. On average, builders reported a 5.17 percent increase in the materials that go into a house.

In the first quarter, Builders FirstSource, No. 9 on MDM’s 2013 list of top building materials and construction distributors, had reported that commodity lumber price inflation negatively impacted gross margins by nearly 2 percentage points, according to CEO Floyd Sherman. CFO Chad Crow said commodity lumber inflation, combined with the company’s limited ability to adjust customer pricing, had a negative impact on gross margin dollars of over $5 million.

One of Builders FirstSource’s main commodity lumber products was selling at an average gross margin of 14 percent at the beginning of the first quarter, Crow said, but by the end of the quarter, it was selling at low single-digit margins. “By the end of the quarter, market prices for this product had increased 30 percent. So in spite of raising our sales prices 20 percent during the quarter, we could still not keep up with inflation,” Crow said.

Universal Forest Products CFO Michael Cole said during the company’s second-quarter earnings call that higher prices impacted not only the company’s sales, but its working capital cash flow and margins. “Our second-quarter gross profit, as a percentage of sales, decreased by 120 basis points, primarily due to the higher level of year-over-year lumber prices,” he said.

However, despite the year-over-year increase, second-quarter prices were in many cases down from the prior quarter. Cole says lumber prices rose from January to March, peaking at the end of the month, then fell 29 percent over the subsequent 11 weeks. Sherman said falling prices in the back half of the quarter relieved some of the gross margin pressure the company had been experiencing from commodity inflation. “We were able to improve our gross margin by 100 basis points for the current quarter due to both improved pricing and higher sales volumes," he said.

According to International Wood Markets Group, lumber and panel prices will move to new highs in 2013 and record highs for lumber in 2014 with the return of a demand-driven wood products market in 2012 due to rapidly increasing housing starts in the U.S. According to the NLBMDA, supply constraints could hamper recent gains in the housing market recovery.

"The shares of reported shortages are not as high now as they were in 2004 or 2005, but the increases since 2012 are quite significant, especially when you take the early stage of the housing recovery into account," NAHB Chief Economist David Crowe said. "In 2004 and 2005 the home building industry was producing over 1.8 million new homes a year, while the current rate of new housing starts is still below 1 million."

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