Guest Column: Two years that changed the industry
The past few years have changed almost every facet of life. The way individuals communicate, do business, and engage with the economy have been seriously altered. One such impacted industry has been Lumber. For example, on December 15, 2022, a Yesler customer secured a load of 7/16” OSB for $271 per thousand square feet (msf). Just seven months prior a customer had paid $2,000/msf for the same product.
Economically, that sums up 2022. With rapidly rising interest rates tamping down exuberance in housing development, the over-stretched slinky known as the lumber and building materials (LBM) supply chain recoiled itself back into its original box.
Something big had to break the work-from-home, pandemic-led housing run-up, and it looks like the Federal Reserve did it. Their focus may be inflation on consumer goods and their tools may be focused on pumping the brakes on the broader economy, but the effect on housing was an abrupt stop. Fortunately, the housing market supply and demand dynamic does not at all resemble the severe oversupply crisis of 2006, so the tires won’t break loose and send this market off dead man’s curve. However, it may take a while to get back up to speed, especially if a recession is the outcome of the Fed tightening.
INDUSTRY IMPACTS:
As a result of the economic volatility of recent years, there have been clear winners and losers. Some impacts are felt short term, like those who owned too much $2,000 wood that’s now worth $271.
Other impacts are long-term, and the outcome may be more cyclically dependent. For those of us who were around in 2006, we know the carnage that occurred from lumber yards to producers who had acquired assets at a premium during the run-up. Many of these assets were acquired at a market premium (irrational exuberance round one). The outcome was bankruptcy or liquidation to cash. The winners were those who picked up those distressed assets and rode them to the top of this market peak.
This time around it may be different.
A short-term pullback in the market won’t expose those who leaned too far over their ski tips with acquisitions at peak market prices. But, if a recession is the order of the Fed for 2023 and 2024, we may see a few faceplants as we get to the bottom of this run.
WHERE TO GO FROM HERE:
While the past few years have been tough and have come with much hardship, there are both hope and concrete actions that businesses can take to recover. The best news for the housing market, regardless of Fed policy, interest rates, and recession risk is that it doesn’t have as far to fall as last time. Whereas I am a contrarian in my views on the need for housing (see recent HBS Dealer article), the latest bull run in housing production did not grossly exceed the fundamentals of demand. Therefore, a pullback is likely short-lived. After all, people need shelter. Babies are born, people immigrate, and the housing market has a long history of self-correcting when left alone. So, the long-term bet in housing is still a winner, even if the short-term bet looks cloudy.
Housing cycles over many years are one thing, short-term seasonal cycles and swings are another—and within the operating control of lumber traders on both the buy and sell side. Yet time and again mistakes are made by commodity traders who take credit for genius when the market runs upward—and blame the market for failures on the downside. It’s easy to trick yourself into thinking you know how to manage market price trends in your favor. Here are a few tips from the tools and data that Yesler provides for traders:
- Always check the market - Relationships matter. You really need your counterparties to be long-term partners. Sometimes they’ll do a favor for you, sometimes you return that favor. But having a trusted partner doesn’t mean burying your head in the sand. Every time we check the data, we find that those who get 3-5 quotes on a commodity load see 15% or more variation in quotes from low to high. Trust your relationships and partners, but verify they are on-market. In the long run your relationship will be more robust if your deals are on-market.
- Speed matters - Don’t read too much into this one. It doesn’t mean you go fast all the time…just that speed matters. Sometimes you need to let quotes sit, both as a seller and a buyer. Other times you need to move fast. The old way of trading by phone had one speed. Digital trading has variable speed control for your current market condition and strategy. When you need to make a deal, the faster you make it the better you do —digital trading wins. When you need to survey all the market and take your time, the more data you collect the better—digital trading wins.
- Track everything - I spoke with a buyer at a lumber yard the other day who said, “Why would I need to write things down…it’s all in here (and pointed to his head).” If you’ve ever compared stories of the same event with another person who was there, you know that memories of the same thing can be totally different. Lumber trading is no different. And we don’t believe in “writing everything down.” We do believe in using a system for digital trading where you and your trading partners can keep track of all your business together—in the same system. The irony for the buyer who thinks they can keep everything in their head is this: digital trading enhances trust and relationships between trading partners because it’s tracked for them! Trust is eroded when two people have different memories of how a deal went down.
TECHNOLOGY CREATES OPPORTUNITY AND IMPACT:
Technology is powerful—and has endless potential for good. I founded Yesler just prior to pandemic-confused markets dominating headlines. The wild fluctuations in supply and demand exposed the value of digital trading that is robust in any market. In fact, exposing the value of digital trading in all market conditions helped us further refine our focus: to help traders win and write the rules for the future of digital trading.
So how do traders win? They sell more loads and make more money.
It’s that simple.
Sometimes it’s about holding out for the right buy or sale. Other times it's about confirming as many loads as fast as possible. On every deal, it’s about building trust and enhancing relationships by a shared record for trades between partners.
Winning is also about meeting your customers where they are—today. We have yet to encounter a trading company, lumber yard, or mill where every person is equally excited about adopting technology. For those who are ready, digital trading is here and ready to help you win regardless of your starting point.
THE FUTURE IS NOW:
Undoubtedly, you’ve heard the term “Black Swan” to refer to unlikely events in markets. Author, essayist, mathematician, and former options trader Nassim Nicholas Taleb has written widely on the topic. In both Fooled by Randomness: The Hidden Role of Chance in Life and in the Market and The Black Swan: The Impact of the Highly Improbable, Taleb describes how humans are regularly fooled by randomness, assigning patterns and probabilities where none are present. Was the market fall of 2022 a true Black Swan? How about the pandemic and its impact on markets? Or were they highly predictable?
In hindsight, both analyses are irrelevant. We are three years into these unique market circumstances. Bets have been placed and some have paid, some have lost, and some long-cycle bets, like acquisitions, are yet to be sorted into winners and losers in future years.
The future of technology in the LBM industry is not a Black Swan! Three years from now there should be nobody saying, “I didn’t see it coming!”
It’s here, now.
The tools to improve the trade by empowering humans, enhancing their relationships, and helping them sell more loads and make more money using technology are spreading across the industry. The question is not whether technology will enhance trading, it’s a matter of which traders will win and write the rules for the future of digital trading.
(Based in Seattle, Washington, Yesler provides a single platform of software tools built specifically for managing and optimizing the buying and selling of lumber and other building materials.)
