The Ro-Mac Lumber & Supply, Inc. Whole House Commodity Index (Index) for February 2013 hit a record high as sheathing prices soared and lumber prices edged up. There is an overall inflation aspect in the building supply market, which is being fueled by a supply chain that has been destroyed during the Great Recession, a lack of available credit and cash, and a buyer who is unwilling to bolster inventories during a period of record highs. The concern many have in the industry is whether these high prices will actually destroy the demand, because projects are now unaffordable or cannot get the proper appraisal.
The Index in February increased to $28,840.43, which is up 1.1% from January and 0.5% more than the previous record high price in October 2005 (which was in the immediate aftermath of Hurricane Katrina). The most stunning aspect of these numbers, which were gathered on February 15, 2013, is there is snow on the ground in the Northern regions and it is the middle of winter for many areas.
There are some major risk factors facing the market, which could propel the market higher. For example, what happens if this spring has a bad tornado and hail season where thousands of roofs have to be replaced? Just look at what happened in Hattiesburg, Mississippi last week. What happens if there is a real spring building season this year, which has not been seen for many years? What happens if more companies go out of business?
It concerns me greatly that the odious rules from Washington, D.C., which include OSHA, EPA and Labor, plus the impact of Obamacare, are creating an environment of uncertainty and fear, keeping companies from gearing up despite increased demand. Firing up manufacturing facilities and mills will require many companies to invest millions in new regulations. In addition, if the economy (which many view as tenuous at best) falters then many companies are subject to the layoff notice rules, which could cost millions. There is also the big gorilla in the room--lack of capital.
Many independent companies simply do not have the cash or credit lines to expand. In short, I have said for several years--we have seen utter supply chain destruction in the Great Recession and it appears this chicken is coming home to roost.
Specifically, here are the items which changed in price the most during the last 30 days in the Index:
If that is not bad enough, here is the latest on future price increases. Roofing manufacturers have announced two price increases for the next three months, and many are predicting that 30-year, architectural shingles will be over $100 per square by summer. Shortages and late deliveries have already begun in the shingle supply industry here in Florida, as manufacturers are slow to add production and demand is outstripping supply.
This week, most of the national door companies announced 6% increases in door pricing in the next 30 days. In addition, concrete manufacturers are priming for an increase. Even worse is the problem with fuel pricing. Expect to see heavy doses of delivery and fuel surcharges added to all supplies, as dealers struggle to cover soaring delivery costs.
Now, for my biggest concerns: I am concerned that pricing will actually eat the market up; and, in my view, the markets are too high. Dealers will be unwilling to build inventories during record high pricing, and it appears an overall softness is beginning to permeate the economy because of the payroll tax increase, expiration of the Bush tax cuts, and soaring fuel prices. This market had a brief correction the first week of February, which was halted by the speculation of a large China buy and a fire at an OSB mill in Canada. This tells me the market could be in an emotional state and the fundamentals of the economy could be shifting, which knocks down projected starts for the year.
Who knows what is gong to happen? However, there is one thing I know for sure--February’s pricing goes against all the norms, which usually means trouble. My recommendation is to update pricing on projects monthly, have a price escalation clause in your construction agreement, and stay informed. Do not use today’s pricing for quoting projects six months from now.
There is a real chance that this high run-up in price will wipe out many suppliers and builders who did not properly protect themselves against high pricing. For that reason, plus the utter weak state many companies are in, I predict we could see more closures in the supply chain in the next year, which will only add to the headaches. Hold on! This ride could get real bumpy over the next few months.
The Ro-Mac Lumber Whole House Commodity Index is based on wholesale costs of the base components to build a 2,200 square foot wood frame home with a concrete stem wall in Central Florida. The Index includes foundation, metal, concrete, block, stucco, cement, wood framing, siding, sheathings, trusses, roofing, drywall, insulation, windows, doors, trim, garage doors, and most building hardware. It does not include décor, electrical, plumbing, mechanical, landscaping, or labor. Because the Index uses current wholesale costs, this should be a strong indicator of the direction of building prices for the next 30-45 days.
Don Magruder is the Chief Executive Officer of Ro-Mac Lumber & Supply, Inc. in Central Florida. Go to www.romaclumber.com to sign-up for the Index and other free market reports. To sign-up for this information via email, contact Rebecca Ballash at