Impacts of Soaring Lumber Prices for Manufacturers and How to Manage the Shortage

As seen in the Boston Business Journal

During the COVID-19 pandemic, an increasing amount of people expressed a desire to renovate and upgrade their houses. Previously, these individuals would visit their local hardware stores to purchase what they needed. However, purchasing materials today has become more difficult due to production shortages, supply chain and logistic issues and increasing demand for lumber. As a result of this new demand, the cost of lumber is soaring. The price per thousand board feet of lumber as of April 30, 2021 was $1,500, an increase of 317% since the start of the pandemic in March 2020(1).

Reasons for the lumber shortage

There are three major factors leading to this lumber price increase.

1. The first major cause of this increasing price originates from the source of the lumber — the sawmills and wood manufacturers. Since the housing bust in 2008, sawmills and wood manufacturers have cut production by approximately 25%. With no significant investments in production capacity over the last decade, sawmills and wood manufacturers were not prepared for the sudden surge in demand. The demand increase also came at a time when some sawmills were shut down for various reasons, including the pandemic.
   
   
2. The second major cause of the soaring lumber prices is the demand. When there is a shortage in supply and an increase in demand, prices continue to increase until supply outpaces demand. The rising housing market conditions continue to fuel demand for lumber, as interest rates are low and new housing statistics are near a 15-year high. Additionally, the increase in people renovating their houses over the last 15 months since they were quarantining at home during the pandemic is drawing on the lumber supply.
   
   
3. A third hidden factor that has been affecting the supply shortage is the impact of climate change and related environmental issues on lumber supplying forests. Canada produces a large amount of lumber, but wildfires in recent years have destroyed significant portions of harvestable forests in the American and Canadian West. Tree-eating beetles have also devastated a sizable portion of the Canadian forest over the last few years. Due to climate change, winter months are becoming increasingly warmer, allowing the bugs to thrive longer. As a result of these issues, tree harvesting in Canada is down by a third since 2009 according to Fastmarkets (2) .
   
   

How to manage the lumber shortage

As a result of these shortages, lumber manufacturing companies need to focus on inventory management and sales order terms. During this time, companies are struggling to maintain appropriate levels of inventory since stock is selling as fast as it arrives. As an example, a company could receive 10 trucks of lumber in one day but sell 11 trucks in the same day. In this case, inventory needs to be carefully watched to make sure correct orders are filled. Some companies can implement drastic measures to prevent confusion, such as sequestering lumber and fencing off products in the warehouse that have already been sold and cannot be used to fulfill newer orders.

Sales order terms have also been affected by the demand for lumber. While typical sales order terms for quotes are for 30 days, lumber manufacturing companies are currently holding quote terms for seven days. Some companies have gone so far as to stop operations, since the material costs are so high that it prices the company out of the marketplace.

Unfortunately, there is no end to this crisis in sight. Some economists predict a drop in lumber prices towards the end of 2021 due to the increase in production capacity as pandemic limitations ease. Lumber manufacturing companies need to expect volatility for the next 12 months and plan accordingly. Ensuring you have the proper inventory management systems and protocols in place should ease the process.

(1) https://markets.businessinsider.com/commodities/lumber-price?utm_source=markets&utm_medium=ingest

(2) https://www.theatlantic.com/science/archive/2021/04/climate-origins-massive-lumber-shortage/618727/