In May, the prices of lumber reached historic highs. Now, they are dropping quickly, although there is still much further to go to return to pre-pandemic pricing.

On Friday, futures fell all the way to $774.00 – a sharp 53.7% decrease from the early May high of $1,670.50.

Suddenly, the bubble is bursting.

How did this bubble form?

Across several industries, shortages that happened as a result of the COVID-19 pandemic impacted development, supply, and price. This was felt in the construction industry, as prices for supply has risen along with a shortage of labor and increase in demand.

When the COVID-19 pandemic began, many lumber mills across the country shut down production in anticipation that there would be low demand for houses during the low point of the pandemic. Other factors, such as mills having to close out of precaution directly related to the pandemic, played a role as well.

This assumption that the housing market would suffer, however, was incorrect. During the pandemic, homeowners looked to do DIY projects around their home that involved lumber. And, as interest rates remained low, demand in the housing market boomed, causing a spike in demand for lumber.

Softwood lumber prices increased by 154.3% from May 2020 until May 2021, per May’s PPI report. In this same time, hardwood lumber prices increased by 36.4% and plywood increased by 70.4%. Other construction materials were impacted too – iron and steel scrap, for example, increased by 76.6%.

This increase in price coupled with a labor shortage that is impacting industries across the board caused a construction backlog that could not keep up with the demand for projects, specifically housing.

What caused the bubble to burst?

As the pandemic wore on and lumber mills remained closed or unproductive, some builders began to stockpile lumber.

At its May peak, the lumber reached a price point that was too high for most consumers. So, at its highest price, wood wasn't selling -- and the price turned.

This decrease in demand caused whose who stockpiled lumber to begin to sell off. So, the change in price of lumber the last few weeks have been a classic economics lesson. Demand decreased, supply increased and prices plummeted. 

What next?

While lumber prices are in a free fall, it does not appear that they are even close to returning to the pre-pandemic prices, according to Devin Stockfish, chief executive of lumber producer Weyerhaeuser Co who spoke at a conference last week per Ryan Dezember of the Wall Street Journal.

“I don’t think $1,000 lumber prices are the new normal. But that being said, when you think about the amount of housing that we’re going to have to build in the U.S. over the next three, five, 10 years, that’s just a significant amount of demand for wood products.”

Interest rates remain low, so demand in the housing market is not going anywhere. Per Dezember, others at the conference thought that the price of lumber would hover between $700 and $800 – clearly well below where it was this May, but still above the pre-pandemic pricing.

The ever-changing lumber market over the last 16 months is just one example of how COVID-19 has changed the market in a significant way. It’s

And while prices are returning closer to normal, it is clear that the construction industry will continue to feel the effects left by the pandemic's original impact.

How does this impact sourcing?

The current freefall in prices changes the procurement strategy from even a month ago and serves as a reminder of the importance of evaluating your sourcing strategy as situations change.

Sourcing for lumber in this tumultuous scenario may be complicated in an RFP process. Lumber mills may now be inclined to just sell to the highest bidder, especially as prices quickly plummet. On the demand side, it may serve best to find the lowest price as mills try to unload as quickly as possible rather than settle on a long-term agreement before prices return to a steady price.

Turning to Corcentric to help source through the after-effects of the pandemic can pay dividends, with service offerings that can help to navigate these fluctuating prices and find the best value for your company.

Share To:

Jonathan Heller

Post A Comment:

0 comments so far,add yours