By the numbers
- Framing lumber and structural panel composite prices from the highest producing regions in the U.S. and Canada trended up during the first half of 2016 but averaged down year-over-year
- Industry revenues: $85.9 billion (U.S. lumber wholesalers)
- Major product categories: Dimensional lumber, panel product, engineered lumber
- Significant companies: BMC Stock Holdings, Inc., American Builders and Contractors Supply Co. Inc. (ABC Supply)
- Market share of top: Lumber wholesaling is a very diversified industry with no single company maintaining more than 3 percent market share
- Recent sales trends: Revenue has grown an estimated 3.9 percent per year on average in the five years to 2016 (IBISWorld)
Market equilibrating: During the Great Recession (December 2007 to June 2009), several domestic and Canadian mills were idled as demand for wood products diminished. The rapid change in the U.S. economy created a supply and demand imbalance that lasted for several years. Many mills and wholesale distributors were initially over-inventoried, and projected gross recoveries declined compared to prior years. As the economy improved, demand for lumber increased. With this increased demand, many idled mills resumed operations but lumber generally did not trade at elevated levels for a prolonged period of time. Current market conditions appear to be in equilibrium; however, additional regional mill capacity or reductions in supply could alter local market dynamics.
Housing starts trending up: Domestic housing starts are noteworthy when monitoring the health of the construction industry and the demand for dimensional lumber. For May 2016, privately owned housing starts in the U.S. were at a seasonally adjusted annual rate of 1,164,000 units. This represents a 9.5 percent increase over the May 2015 rate. Home size and alternative building materials such as steel studs could overstate the implied demand indicated by the U.S. Census Bureau and the Department of Housing and Urban Development official housing start numbers, but the numbers are still seen as favorable.
Lumber prices strengthened during second quarter: Random Lengths’ framing lumber composite price had trended up since February 2016; however, it began falling at the end of May. A similar trend was observed for structural panel products. The average price of framing lumber during the first six months of the year was down 2 percent year-over-year; structural panels were down 4 percent. Composite prices were lower during the first quarter compared to last year but rose during the second quarter.
Lenders should keep in mind that while industry publications can provide regional market trends, actual printed prices are not necessarily representative of transactional activity. Prices generally represent full truckload quantities with FOB mill freight terms. Long-term supplier relationships, volume discounts, and freight logistics can impact the actual gross recoveries in the event of an orderly liquidation.
Geography may limit marketability: Generally, lumber distribution can be regional due to freight logistics and cost. Given robust mill activity in the Southeast, a wood products inventory located in the Pacific Northwest would not necessarily be an attractive buy for a potential customer in Georgia. Therefore, the liquidation footprint would likely remain within the traditional geographic area of the mill or of the wholesaler’s existing customer base. Additionally, regional building practices, builder preferences, and/or codes may limit the marketability of some materials. Assuming dimensional lumber milled in Canada for export to the U.S., tariffs and currency exchange fluctuations can also impact gross recoveries.
Green lumber may have lower recoveries: Special consideration should be given to “green” and undressed kiln-dried lumber. Cut-to-length and/or tree length logs are optimized to yield the longest length possible of specific dimensions (e.g., 2x4, 2x6, 2x8, etc.) The cut lumber exits the sawing operations green and will require drying to reduce moisture content. Once dried, the lumber is usually dressed and graded. Sold “as is, where is,” the market for green lumber is generally limited to other operations with kiln and dressing capabilities. Undressed kiln dried lumber would also have limited marketability and would likely be sold to buyers with dressing capabilities. If the subject inventory is located in a region with several local mills, the demand for green and/or undressed lumber would be greater than a remote mill. Also, if regional mill activity is declining, the local “appetitive” for green and/or undressed kiln dried lumber may be depressed. Again, freight logistics and cost will impact the price potential buyers are willing to pay for this inventory.