On today’s show we’re taking a closer look at supply chains in today’s environment. I’m now hearing daily reports of empty shelves at building supply stores.

I’m seeing posts on social media of contractors who have placed orders for construction lumber with some of the big box lumber stores two weeks ago and still do not have their orders fulfilled. I experienced the same thing last year when purchasing cedar for a small project. The supplier took my order for material that was in stock. By the time the staff went to pick the inventory and fulfill the order, someone else had purchased the material. I found another source and I asked for a refund. A month later, I received a phone call that my order was ready and I could come and pick it up. Needless to say they were surprised to hear that I had cancelled the order and already received a refund.

The higher cost of lumber is adding between $25,000-$30,000 to the cost of a new home, if you can find the material.

Earlier this year, one of my general contractors submitted a change order asking if he could replace some roof decking with a superior plywood product, since the builder grade chipboard was out of stock. The price difference was nearly zero because the more commonly used product was in such short supply that it was actually more expensive than plywood. Naturally I said yes.

The recent quotes I received for materials made me redevelop all of my budgeting spreadsheets. Some construction projects have been cancelled due to the high cost of construction. In my home market, a new $100M police station tender was withdrawn. The police station is needed and the budget is in place. But the high cost of construction seems to be extending beyond the cost of lumber.

So the question is why have lumber prices gone up so much, especially at the retail level?

Madison’s Lumber reporter has been publishing weekly since 1952. They’re one of the foremost authorities on the lumber industry. Canadian lumber is a significant contributor to the US construction industry. The pandemic lockdowns of 2020 closed saw mill plants for 6 weeks in Canada, and then when they re-opened they were cautious on ramping up production. Meanwhile, demand did not fall throughout the year. The retailers experienced a spike in price coming from the sawmills. The retailers had no time to react. They had no time to hedge with futures contracts. They were selling framing studs at $3.50 and then turning around and buying the replacement inventory from the sawmills at a higher price. They had never experienced that before. A sheet of plywood that used to sell for $35 is now $100.

For the sawmills, the year 2020 was ideal. They want to close the year with the log yard full of new timber to cut and the yard with finished inventory empty. That’s exactly what happened. But the demand is so far in excess of supply, that sawmills are resorting to transporting finished product by truck instead of by rail. The transportation cost by truck is triple compared with rail. So the rail transport is going unused, and there are a shortage of truckers, which further pushes up the price for transportation of finished goods.

The major builders are definitely taking steps to ensure security of supply. There is no question in my mind that builders are hoarding materials in order to secure supply. I’ve spoken with several major builders who have purchased the lumber for about 2,000 residential units at a time. That inventory will be consumed this year, but not next week. This shadow inventory follows classical economic cycles. At some point, production will expand to meet demand and the stockpiling behaviour will end. At that time, companies will stop placing excessive orders to protect their security of supply. They will consume their in-house inventory and demand for materials will drop despite continued construction activity.