Hardwood prices are on the rise, and it’s a simple matter of basic economics—supply and demand—as it relates to raw materials.
Essentially, hardwood lumber prices have been increasing dramatically since August. While this was somewhat expected coming out of a recession, it is the extent of these price hikes that have manufacturers reeling. Some say prices are up as much as 50% since last winter.
“We have seen this hap- pen in the past as the economy comes out of a recession, particularly in the mid 1990s and early 2000s,” said Daniel Call, vice president, wood product management, Armstrong. “In the 2000s, there was a 40% run-up in hardwood lumber prices over an 18-month period, and in the mid-1990s they went up about 50% over the same period.” The issue, he said, is that this time around the rate of increase is much more steep. “In the last six months, the average is already up about 25%. It’s much faster than past recessions and it’s not done climbing.”
Many hardwood flooring manufacturers have announced price increases beginning as early as mid-March. Most have an April 1 target.
Call said the reasons are relatively straightforward.
1. The residential slowdown that has lasted for a number of years. During this period, the demand for lumber has fallen by half. As a result, prices fell and a number of lumber suppliers went out of business. “At the same time, some timber owners, seeing the prices decline, decided to sit on their land and not harvest their trees to wait for a more profitable period,” Call said. “So because of all this, supply dropped below demand.”
“As an industry, we are off 70% on production,” said Charles Netterville, owner of Fred Netterville Lumber Co., an Arkansas hardwood producer. “Prices now are around what we were getting in the 1980s. We need to see prices go back up substantially in order to survive.”
Neil Poland, president of Mullican Flooring, agreed, noting that half of the company’s vendor base has either closed or reduced its production dramatically, “so there is a lot less lumber out there. Right now lumber production is below flooring industry usage.”
2. Lack of loggers. Poland said in addition to sawmills closing, many loggers have exit- ed the business. “In some areas there is a real shortage of loggers,” he said.
3. The tightening of credit. Another force making it tough for small businesses to survive is the credit situation. There are thousands of these mostly mom-and-pop types of operations, which generally have only 20 or 30 employees compared with the big North American lumber mills that produce softwoods like spruce, pine and fir to create housing frames. If a lumber mill cannot get credit from the bank, it cannot buy logs, which further restricts supply. “They need working capital from their banks so they can carry inventory,” Call said.
Until credit availability improves, there is no chance shuttered hardwood mills will ever reopen. For credit to loosen, owners will have to show profit potential, which will take a better economy and higher prices for their product.
4. Unusually bad weather since late fall, particularly in February. This has also negatively impacted lumber supply, both for solid lumber as well as veneer logs. “Not only is there fewer lumber mills around, but the ones that survived can’t get the logs,” Call said.
5. On the demand side, although the U.S. market has not picked up in any meaningful way, exports of lumber have remained strong year over year. “Some of our competitors have had to catch up their yard inventory to prepare for the spring selling season,” Call said. “Last year many ran down their inventory because of the economic climate and lack of demand. There is a three- month period where the lumber must dry out in the yard before it can go to the kiln. So in an effort to get more than is naturally available, competitors have been aggressively bidding the prices on lumber.”
As a result of all this, Armstrong is going up 5% to 7% on solid hardwood shipments and 1% to 4% on engineered as of April 1. Mullican also has an April 1 price increase of 5% to 7%. Mohawk previously announced a 4% to 6% increase taking effect March 15. Retailers told FCNews they have received letters from other manufacturers announcing similar hikes.
Call advised retailers to pass on these increases to consumers. “While everyone absorbs a little bit to make it more palatable in difficult times, we think this one is too large to absorb, so some must be passed on to the consumer. In the past two recessions, retailers have successfully passed on increases.”
The other reason Call advises retailers to pass on the price hikes is because this may not be a “one and done” situation. “I think if the rate of increases continues on its current path, which we think it will, or even subsides a bit, there will have to be more increases in 2010. The increases we are putting forth right now only offset what has been going on for the last eight months.” Call added that no entity will be spared, meaning the increases are going to builders, retail groups and home centers in addition to specialty dealers.
Mullican’s Poland noted that albeit slight, there are some positives in all this, particularly as it relates to the upper grades of lumber that are not normally used in big volumes in flooring. “With the prices having increased significantly, there is an incentive to saw mill owners to increase production. In the past year the prices on the upper grades of red and white oak were so depressed it was hard for them to make a profit. Now they can operate profitability. The idea here is to get land owners to sell their timber and have enough loggers to harvest the tracks of land.”