The challenging return to normalcy

LAS VEGAS — The housing market recovery with all of its optimism, its forecasts of 20% increases and its clear path to 1 million starts had plenty of people smiling at the International Builders' Show.

It also had some people thinking, and maybe worrying. The causes of concern include scarcity of product and the idea that delivering the product to a market returning to normalcy may come with shocks to the system.

Granted, in the aftermath of record lows in home building (and home improvement spending) the idea of a boom-driven scarcity falls squarely in the category of "good problem to have." But that doesn't mean it's not still a problem.

This problem was the topic of discussion here in Las Vegas during IBS at a meeting of the Presidents Council, a business group of hardware and LBM executives, distributors and retailers.

"Simply put, there is not the capacity of lumber production to return to the historical levels that we saw before," said Wayne Guthrie, who as the senior VP sales and marketing for forest products giant Canfor has a front-row seat on raw material trends. "On top of that we have had environmental issues and other cutbacks in certain lumber producing areas that will restrict them."

Make no mistake: The mood of the Builders' Show, and of builders in general, was upbeat. But then again, the recovery brings supply chain challenges.

"When builders ask me about 2013, I try to temper their optimism a bit," said Tony Callahan, formerly an executive of a major builder, now CEO of Callahan Consultant Group. "I think you're going to have higher costs, tighter skilled labor and more government regulations."

A risk to the recovery is the possibility that raw material prices will "crank up too fast," slowing down the recovery itself. That is a real possibility given that a lot of builders have four- to sixth-month backlogs, with a lot of the pricing unprotected, Callahan said.

"Lumber prices are definitely on the rise," Guthrie said. "It was a little intimidating when I saw the No. 1 concern [among builders] is higher material costs."

Guthrie said history is about to repeat itself. Lumber prices peaked in 2004 — a full two years before the peak demand kicked in. The reason for the early peak? "The supply chain simply broke down," Guthrie said. "We had the lumber. We just couldn't get it to the marketplace in an efficient way. There weren't enough rail cars. There weren't enough trucks. And there wasn't enough capacity to get that lumber out. You can see that scenario again soon."

This "supply chain crunch" will be the first wave to hit the recovery, he said. But there's also the shortage of actual lumber. That second challenge is largely the result of a little bug. The beetle has ravaged forests for about 10 years. And while many forests remain with harvestable timber, the beetles' path has pushed some of it farther from the mills, which will add costs to the manufacturer, Guthrie explained.

The supply chain serving the United States is not up to world-class standards, in terms of efficiency. "I think people would be somewhat surprised to learn that we can ship today a container of lumber to Shanghai from British Columbia for less costs per unit than we can ship a railcar to Chicago," Guthrie said.

There is work to do: "It is going to be incumbent on us to study that supply chain and try and figure out the most efficient manner to get product from the sawmill to the job site."

The panelists, which also included Ron Beal, CEO of Memphis, Tenn.-based Orgill supply, and Paul Hylbert; CEO of Kodiak Building Partners, also hit on the need for improved technology as a response to the coming shortage of labor, particularly skilled labor.

Figuring out how to move products is what the lumber industry does, and has done for decades. Today's challenges are just another chapter in that story of adapting. At least that's how Hylbert of Kodiak Building Partners wrapped up the panel presentation.

"There was the issue of scarcity back in the 1960s — when we thought we were going to turn out of everything from oil to wood and the like," Hylbert said. "But there's the capitalist system and the creativity of mankind. We'll find ways. And we'll find cheaper ways to do things."