November/December 2004

     Cause and Effect
Manufacturers and Distributors Debate Rising Prices
by Megan Headley

The last year’s growing demand for new homes seemed like good news for the building industry—until the cost of materials got factored in. A host of conditions have influenced the price increases, according to the manufacturers and distributors directly affected. While few can claim they haven’t been affected by the scarcity of some materials and the growing cost of others, there are some businesses that offer a positive interpretation of these events, as well as predictions and advice for the future. 

Converging Causes 
Why the price increases? There are a number of theories but so far only the laws of supply and demand have been proven. Materials such as steel, copper, panelized systems, gypsum board and OSB board are among those that have been affected.

“There are basically two effects that we’re seeing: one is the cost being higher, and two, things just aren’t readily available,” said Michael Carliner, an economist with the National Association of Home Builders (NAHB). 

Both of these effects have proved damaging not only for builders, but also for distributors and dealers of building materials. Carliner and other experts attribute their causes to several factors, including production capacity, trade restraints and global factors such as the demands for steel and cement in China, which has seen its own recent construction boom. 

Record fuel increases and an increase in more materials shipped overseas to places such as China and Iraq have affected the availability not only of materials, but also of ships to transport those materials to the United States. In addition to all of this, the home building demand in the U.S. has been so great over the last few years that the reduced supply can barely keep up. 

“Homes today are being built at record rates in terms of their square feet, even though there were probably more housing units sold before,” said Carliner. With the increase in building projects has come the rising cost of home construction, up by around $5,000 or more since last year, according to Carliner. 

“Originally the builder got caught with that [increase], now I think that cost has been absorbed by the cost of the house,” he added.

When questioned about the cause behind the price increases, Peter Hall, chief executive officer for the distribution company Lumber Products, of Tualatin, Ore., said he saw the demand side of the equation as the most important. “High demand for residential building,” answered Hall. Although Hall said he recognized the product shortages that added to the higher prices, he felt that this year’s high demand for materials was the primary influence on costs. 

According to Steve Huszar, the chief financial officer for Millwork Distributors Inc. (MDI), of Oshkosh, Wis., other factors are influencing the rising prices. These include the supply shortage caused by Florida’s hurricane damage. For many companies, the hurricanes only worsened conditions. 

“Really we’re getting it from all angles,” said Huszar. 

However, Jim Snodgrass, vice president of export sales for Contact Lumber, based in Clackamas, Ore., focused on one supply problem in particular. “The shortage of supplies from South America have really affected the millwork market in a big way.”

According to Snod-grass, two factors affected the amount of lumber shipped from South America. First, more ships than usual were tied up transporting products and materials to China. Second, at certain times of the year, such as during South America’s summer, perishable goods take a higher priority over other items being shipped. “But it seemed like that went on longer than usual,” Snodgrass added. 

“This year’s shortage was not so much a shortage of product as it was a shortage of shipping capacity,” agreed Allen Dyer, the president of ECMD Inc., of North Wilkesboro, N.C. “When virtually all millwork products were produced domestically, the short supply chain was much less vulnerable to interruption due to shipping and logistics management issues.” 

Indeed, companies immediately affected by the shipping interruptions were those manufacturers who bought 100 percent offshore, according to Snodgrass. As those companies began looking to other markets and driving up the demand for domestic lumber, the laws of supply and demand were finally felt across the building industry. 

Looking at the Impact

The fact that costs for all building materials have steadily increased over a period of several months has also had a big impact on many companies. 
“Usually we get one price increase in one year, this year we’ve seen three or four and it’s hard to pass this along to our customers,” said Huszar. 

Huszar explained that for MDI, one problem in increasing prices for customers every three or fourth months means taking the time to adjust hundreds of pages of catalogs constantly to reflect the price increases the company sees. 

Hall also faced difficulties in adjusting his company’s prices to reflect the rising costs of materials. He found that, for his company, frequent price adjustments were rarely possible. “The market will not always take it,” he said. 

Huszar added that, in addition, some customers have a difficult time seeing how the increase in fuel prices affects what they see in rising costs for millwork products. “A lot of what we do is petroleum-based,” Huszar explained. 

Some manufacturers and distributors feel simply that other companies should have expected the supply problems due to the increasing reliance on offshore products. 

“Some competitors still manage their supply chain like the factory was next door and trees used for raw materials were grown here in the U.S.,” said Dyer. 

Dyer explained that his company generally stocks large inventories to compensate for the fact that most of its materials come from offshore. Having this stock to fall back on has been one way of avoiding the impacts of the shortages. Dyer said his business has even had some success with supplying customers of competitive businesses. He attributed this success to supply chain management technologies and processes built into his organization.

“Some US manufacturers and distributors faced a legitimate shortage of raw materials or finished products this year,” said Dyer. “But, I believe most dealers and builders were able to source adequate supply from alternate sources and made it through without major shortages. Of course, everybody paid more for the product, and that in itself probably brought some grief to those who were committed to long-term price contracts.” 

For other business, it was the multitude of factors affecting materials at once that hadn’t been a consideration. 

“This really caught people by surprise because prices had been stable for a while,” Snodgrass said. “We got calls from people we hadn’t heard from in a long time.” 

Snodgrass’ forced reply in most of those cases was to turn down callers, sending his limited supplies instead to those customers who had been with his business for years. 

A Silver Lining 

In some part, the recent discussions about the problems of rising prices have been more unexpected for the industry than the actual problems caused by them. While a large number of factors seemed to have contributed to this year’s issues, many members of the millwork industry, for instance, have said that there is a bright side to the issue. Dyer sees the past year in a very positive light. 

“I believe the majority of participants in the millwork industry would say: ‘I’m having a good year,’ not only because volumes have been good, but because a recovery from depressed market prices helped them return to profitable operation,” Dyer said. 

In Snodgrass’ opinion, the price increases this year have been easier to handle than in years past. “The saving grace in the whole thing was that a lot of other materials were going up as well,” he said. 

Because the entire building industry felt the pinch of short supplies, with increases in prices felt for materials such as sheetrock and concrete as well as lumber, Snodgrass said he felt the market was more receptive to the price increases. “They couldn’t go offshore and get a better price, they couldn’t turn to other distributors and get a better price.” 

In addition, the market-wide increases made it easier to pass on the costs to customers. “I felt it was easier to do this year because it was widespread,” Snodgrass added.

Forecasts for the Future

According to Snodgrass, the approach of winter, traditionally a slower time for the building industry, will likely determine in which direction prices begin to move. He said that the goal for most manufacturers is to keep plants busy at all times, a requirement that he hopes will soon cause lower prices. A similar opinion was expressed in an article in the “Raymond James Quarterly Housing Review” issued in September. According to the review, there is expected a moderation of prices toward the end of the year due to a combination of the seasonal slowing of the building industry and higher interest rates cooling the general housing market conditions. 

Huszar said that soon his company is going to have to sit down and look at adjusting prices for next year to reflect this year’s high price increases. “It’s going to be shocking for people,” he said. 

In the meantime, Huszar said that MDI has absorbed most of these increases. 

According to Dyer, dealers and distributors should view this year’s shortages as a warning and prepare for similar problems in the future. 

“I think we will remain vulnerable to similar supply interruptions, even though most observers see no fundamental shortage of raw materials or manufacturing capacities,” Dyer said. “For this reason, I believe tomorrow’s preferred suppliers will be those who have good supply chain management and logistics infrastructures, which are probably already more important than their manufacturing abilities and raw resource ownership.” 

Hall, however, qualified that warning with a milder prediction. “I don’t see for 2005 the demand we saw in 2004,” he said. 

Of course if knowing what to expect is half the battle, this year has provided a valuable tool for companies. The numerous factors that seem to have caused the increases in materials prices have been so wide ranging that manufacturers and distributors should have a good idea of all the things that can possibly go wrong. 

Megan Headley is an assistant editor for SHELTER magazine


© Copyright Key Communications Inc. All rights reserved. No reproduction of any type without expressed written permission.