September 16th, 2021
Was the COVID Lumber Supply Chain Primed for Failure?
By now, we in the LBM Industry have lived the story of historic lumber prices and volatility since the pandemic came along in March 2020. We’ve heard the “why” - supply cutbacks, big DIY demand, and housing and remodeling demand driving prices up. But one factor has gone largely unnoticed - when COVID arrived, the supply chain was already under strain due to unusually high demand in the winter of 2019.
In the early spring of 2020, during the initial COVID outbreak, the housing market contracted. Suppliers responded, constricting supply. In the late spring and summer of 2020, demand for lumber rebounded and prices skyrocketed. Graphically, demand looked like this relative to a typical season:
Notes on the data: The black line is US Census monthly housing starts. The dashed red line is typical seasonality for gently rising housing markets between 1.0 and 1.7 million starts (1991-2002, 2012-2020) indexed to the annual total housing starts actual (2020) and estimate (2021).
The Prequel: Winter never came!
The winter months prior to COVID set the market on its crash course. The graph below shows a typical winter (Jan 2019) and the winter leading up to COVID (Jan 2020):
In the pre-COVID winter, demand never dropped! As a result, inventory throughout the supply chain was below normal, and supply chains were set-up for a perfect COVID storm. Prices responded accordingly. It took over 12 months for the market to recover.
The Sequel: Winter is coming.
The big question going forward: What happens this winter? A typical winter season allows suppliers to take maintenance downtime, then supply the channel, build inventory and prepare to deliver on forecast in spring 2022. If winter never comes, then hold on for another big run.
Monitor the US Census Housing Starts, unadjusted for seasonality, this fall and winter for the COVID market sequel in 2022!