Manage episode 292208489 series 2084625
Michael from Ottawa asks,
I heard that lumber distributors are stocking pile of wood to keep prices high. Isn't that illegal? That would be artificial scarcity. Then what is the difference between artificial scarcity vs price fixing?
Michael this is a great question.
The notion of illegal price fixing has been uncovered in various industries from time to time. If it were happening, it would be hard to detect and would require a deep investigation of the type that probably only the FBI or the Justice department could undertake. I spoke with a number of industry insiders and I think I have figured out what is most likely happening.
I’m hearing consistent feedback from multiple sources which leads me to believe that the major source of demand is not only for current new construction projects, but also to secure future supply.
This is best explained by segmenting the supply chain into various elements.
- End buyers who buy product only on the day that they need it.
- End Buyers who pre-purchase materials and warehouse the materials themselves
- End buyers who write long term contracts to effectively pre-purchase materials and secure future supply when they need it.
There is no question in my mind that many of the major builders are doing everything they can to secure future supply of materials.
I’m going to quote from a letter that was published by the CEO of a Texas based Matheus Lumber to all of its customers at the end of last week.
"As of today, mills cannot keep up with North American demand for forest products. With housing hitting 1.739 million starts in March, there is simply not enough supply to meet the demand. Additional capacity plans for the mills will probably not happen fast enough and prices will continue upward pressure. Mills are currently 45-90 days out and other items even longer. In addition, we are continuing to see 30 days or more in shipping delays for materials ordered. The mills are struggling to find transportation for the material that is already sold. Furthermore, the massive demand is causing the mills to raise prices by the day and/or hour. Prices have now exceeded anything thought possible, with no immediate relief in sight.
The Engineered Wood Products are the scarcest among all wood products. Due to allocations by the producers, there is essentially no open market Engineered Wood Products for immediate sale. Some of the major Engineered Wood producers are now only quoting projects that ship after January of 2022.
What the CEO of Matheus Lumber is saying echos what I’ve been hearing from other people that I’ve spoken with. I’m hearing many new construction home deliveries that are delayed by several months due to material shortages.
If you’re a builder, material shortages impact far more than just deliveries. It means that you have employees sitting idle.
In my view the acute shortage we are seeing is real to a degree and it has been made artificially worse by a few companies with deep pockets buying up whatever supply exists in order to secure their supply. That has left the retail market and the small players to fight over the few scraps that are left over.
I’m also hearing noises that the US is going to reduce tariffs on Canadian lumber from the current 20% to 9% in order to reduce the cost of lumber and to stimulate more sales coming from Canada to the US. Traditionally, Canadian lumber makes up about 30% of the US supply of softwood lumber for new home construction.
I’m personally not seeing any signs of inventory manipulation to result in price fixing. I’m seeing an industry scrambling to meet demand. I’m seeing transportation issues, and I’m seeing large inventory purchasing in order to secure supply.