Summer Forecast
by Marc Osborne

When all the economic news seems to be bad the last thing you want to hear is that already steep building materials price increases are likely to continue. But for the rest of this year at least, that's the likely scenario. This stands in contrast to the relative stability of commodity lumber and plywood items. Those items spent last year giving up all the price increases they'd garnered in the housing boom of 2003 to 2005. This year lumber and panel prices have been relatively steady and should continue that way.

Building materials are generally defined as everything a builder or remodeler uses in frame construction that isn't actually dimension lumber or plywood sheathing. Those materials have increased in price significantly this year even though demand, reflecting the general downturn in the economy, has dropped compared to last year. Steel wire rod, the raw material used in making many fasteners, cost $621 per metric ton in January. That was already up 25% from the January 2007 cost of $495. The cost jumped another 11% in February and then another 11% in March to $758. So what does that mean for us? A year to date 48% increase in the cost of hot dipped galvanized nails for one. Other steel and metal based products (think ceiling grid or rebar) have also skyrocketed up.

Fiberglass roofing has had several price increases this year. Manufacturers typically announce price increases several weeks in advance to allow customers to bring in more stock at current prices as well as to prepare the marketplace for higher prices. In a telling sign of the increasing cost pressures faced by manufacturers, one, Owens Corning, moved up its 7-9% July 1 scheduled price increase to June 16 and increased the increase to 10-12%. Others are following suit.

The trend is the same with all non commodity categories...insulation and drywall are no exceptions. There are many reasons for this steady drumbeat of price increases. Each category has some unique factors. The ongoing re-roofing activity in Florida from hurricanes over the last three years, as an example, would have kept pressure on roofing prices even if all other factors remained the same.

But one fact underlies everything: we're operating in a global economy and we're all competing for scarce resources. The ranks of countries defined as having advanced economies has grown. They're no longer limited to Europe, North America, and Japan. From the Middle East to India, China, and Brazil economic growth based on cheap raw materials and inexpensive labor has spurred the growth of a new middle class in many formerly second or third world countries. The Chinese middle class is said to number over 300 million people and growing rapidly. That's equal to the population of the US but less than a quarter of their population...there's a lot of room for growth. All these people want the same cars and washing machines we take for granted. They also want a house and garage to put them in. This increase in demand is putting the supply chain for raw materials under severe constraints.

The most evident pressure is on petroleum derived products and, of course, on the transportation networks necessary to transport raw materials and finished goods. In roofing in particular, petroleum is an important component. It also figures prominently in any product with vinyl as a constituent. But even if not used directly in manufacturing, the price of oil drives up the cost of goods because it now costs so much more to get those goods to market.

What's more, some of that increased cost doesn't show up in the unit cost but as a separate fuel surcharge line item. Just like airlines, many companies now tack on an extra charge to try to compensate for their increased cost of doing business. GAF, for example, already has a $150 per shingle truckload fuel surcharge. They're raising that to $200 on July 1st. For the average lumber yard that $200 amounts to another price increase of 2.5% on top of the higher cost per bundle.

At some point a relative balance between supply and demand in raw materials will be reached and prices will stabilize. But for now there's almost a panic mentality at the manufacturing level. They don't know from week to week how much their materials will cost. Their sales aren't great because demand has fallen back sharply from a couple years ago. In many instances they're taking orders based on pricing them when they're ready to ship. That passes the burden down to the lumber yard.

The best advice for the summer season is to buy up what you'll need now. If you can store it until you need it buying any non wood building material is the thing to do. Lumber and plywood should be in good supply but their prices are likely to creep up too just from the increased transportation cost.

Marc Osborne, a 25-year industry veteran, is the Vice President of Purchasing for National Lumber.