| Posted on Sun, Sep. 21, 2003 |   |
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| Lumber prices soar, but effect is muted Inquirer Real Estate Writer
Unless you and your family are loggers, the price of lumber isn't usually a topic of dinner table discussion. But it is definitely a talking point among builders and U.S. and Canadian officials and the logging industries there. There are a number of issues, all related to lumber price and availability and how they relate to construction costs, especially for new homes. One immediate concern has been the hefty increase in the price of plywood and the wood-composite product oriented strand board (OSB), both of which are used in residential construction as sheathing. Random Lengths, of Eugene, Ore., which tracks lumber prices, reported that structural-panel prices reached $535 per 1,000 square feet on Sept. 12. North-central 7/16-inch OSB was commanding $445 per 1,000 square feet, according to Random Lengths. It reported Aug. 22 that OSB's "historic price run reached stratospheric levels as producers aggressively raised quotes, often several times per day." The price per 1,000 square feet of OSB on Aug. 22 was only $374. The increase is attributed to wildfires that have destroyed thousands of acres of timberland in British Columbia and interrupted logging operations. Combined with continued strength in the U.S. residential-construction market and the weakness of the dollar compared with currencies from countries other than Canada from which plywood is imported, notably Brazil, price increases in structural paneling have surprised just about everyone. Another factor is involved in the increased demand, although more has been made of it than seems to be justified, considering the overall picture: The U.S. Defense Supply Center in Philadelphia recently purchased about 20 million square feet of plywood for shipment to Iraq. That is a fairly small amount; annual consumption of plywood in this country totals about 16 billion square feet. Although stocks of structural-panel producers have benefited from the price increases, do not expect the situation to last much longer. "I think the price hikes will end and be partially reversed in the next few months, provided that we don't have a big hurricane," said economist Michael Carliner of the National Association of Home Builders (NAHB). Russell Taylor, publisher of Wood Markets, an industry newsletter in Vancouver, British Columbia, thinks the long-term outlook for OSB prices is good for consumers but not so great for the industry. "The next three-year period could become quite bleak for OSB prices if current plans to 'stay the course' occur," Taylor said - adding 7.5 billion square feet of capacity at 16 mills to chase "a U.S. demand scenario that is expected to show little growth." A typical 2,000-square-foot house consumes 6,000 square feet of structural paneling, the NAHB says. A year ago, Random Length's structural-paneling composite index was at $240 per 1,000 square feet, while OSB was $139 per 1,000 square feet. Just going with the composite price, the 6,000 square feet that cost $1,440 in September 2002 was at $3,210 this September, about 21/4 times more expensive. Every 2,000-square-foot house needs 16,000 board-feet of framing lumber such as 2-by-4s and 2-by-6s. In September 2002, 16,000 board-feet, at $288 per thousand, cost $4,608. In September 2003, it was $382 per thousand board-feet, or $6,112. Thus, the total cost of all lumber required for such a house has risen to $9,322 from $6,048 in a year, Random Lengths says. Wood products account for about one-third of the total cost of materials used to build a house, NAHB says. How have the increases affected area builders? Plywood prices have risen 20 percent to 25 percent since July, said Marshal Granor, a principal in Granor Price Homes in Horsham, who described the gain as "extraordinary." But long-term contracts with suppliers of OSB and roof trusses are preventing similar increases. "So, at Lantern Hill in Doylestown, the supply contracts for panels and trusses will remain in effect until that project is completed," he said. "For other projects, that may not be the case." Increases in the prices of houses are based purely on the marketplace, not on higher materials costs, unless those costs are extraordinary, Granor said. "In slow times, we tend to absorb the increases," he said. "Our contract has an escalation clause that [says] if the house hasn't been started and materials prices increase, we can raise the price of the house to compensate. "We've never done it," he said. As builders are quick to point out, houses are priced based on what people are willing to pay. "It depends on how the builder prices his houses, but it doesn't necessarily follow that if your costs go up 7 percent, the buyer will be automatically willing to pay more," said Kira McCarron, vice president of marketing for Toll Bros. "What a buyer pays not only depends on what he is willing to pay, but what the person down the road paid for a similar house with the same amenities," she said. "Historically, materials prices tend to fluctuate," said Toll's senior vice president, Zvi Barzilay. "Because we deal directly with the mills, we can ease the effects of... increases a little bit." What is concerning many builders are thefts of plywood from construction sites in the wake of rapid price increases. Orleans vice president Gary Schaal said his subcontractors had warned the company's site superintendents that such thefts were occurring. Precautions are being taken, he said. Instead of leaving materials on site at the close of the workday, some builders are moving panels inside and nailing them together. Others have increased security. "These are not do-it-yourselfers who won't pay higher prices at the home centers, but professionals," Schaal said. While plywood prices have risen owing to shortages, "Home Depot has contracts with our major supplier, Georgia Pacific, to ensure we continue to get the quantities we signed up for," spokesman Don Harrison said. "In addition, we know this is the peak time of year for hurricanes, so we stock up additional supplies..." The current increase in structural-paneling prices mirrors the rapid rise of building materials' costs in the boom years of 1997-99. In late 1999, the price of drywall, bricks, roofing materials, and insulation rose substantially because many manufacturers had reduced plant capacity in the recession of the early 1990s and had not retooled. Builders did not raise their prices to compensate, and the shortages eased by spring 2000. Also affecting current lumber prices is the Canada-United States Softwood Lumber Agreement that expired in March 2001. The five-year agreement provided Canadian softwood-lumber exporters with guaranteed market access to the United States and a guarantee against U.S. trade action during its life. The pact permitted the fee-free export to the United States of 14.7 billion board-feet per year of lumber first manufactured in British Columbia, Alberta, Ontario, and Quebec. Canada was required to collect fees when that limit was exceeded. As stipulated in the agreement, Canada gave export-level allocations to eligible companies annually. Lumber from the other provinces and territories was exempt and could enter the U.S. without permit. After the U.S. and Canadian governments failed to extend or renegotiate the agreement, the U.S. International Trade Commission ruled in May 2002 that the U.S. lumber industry was threatened with injury by imports from Canada. The action triggered 27 percent tariffs on Canadian lumber imports, including 8 percent anti-dumping duties. On Aug. 13, a North American Free Trade Agreement panel ruled that the International Trade Commission did not adequately explain or support its findings of a threat to the U.S. lumber industry, and gave the commission 100 days to reconsider. The NAHB welcomed the decision, long contending that the tariffs would hurt both the industry and consumers. The Canadian government, too, welcomed the decision. The Coalition for Fair Lumber, representing U.S. softwood producers, took another view. "We can compete against any lumber industry in the world, but we can't compete against their government, too," said the group's chairman, W.J. Wood.
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