Gypsum Wallboard

Drywall producers weren’t ready for the record level of housing demand in 2004–05, but they are unlikely to repeat that mistake next time. While the dust settles on what was a market of short supply and, eventually, high prices, manufacturers are forging ahead with plans to expand their operations this year and next and ready themselves for housing’s comeback.

To maintain some measure of the higher prices and margins they enjoyed (and thus fund their growth plans), makers have nurtured brand loyalty to move drywall out of commodity status. “When you have brand loyalty, you can more easily control prices,” says Markstein. “As demand increased [in 2004], gypsum producers kept prices low to build those relationships,” he says, and then leveraged them to raise prices without curtailing demand; that is, until the housing market did it for them.

Asphalt Roofing

Point the finger at oil refineries for the tight supply (and thus price volatility) of asphalt composition shingles. To get more out of each barrel of oil and dip their beaks deeper into the revenues and profits of rising gas prices, refineries invested in equipment that leaves fewer low-margin by-products—such as asphalt—behind.

According to a May 2006 survey of its builder members, the NAHB found that more than 80% of reported price increases for comp roofing were caused by the shorter supply of asphalt. And the forecast, so long as gas prices remain relatively high, is for more of the same, says Markstein, especially as the Gulf Coast housing market replaces its roofs with what has traditionally been an affordable alternative to wood shakes and concrete tile.

Lumber and Wood Panels

Through the fourth quarter of last year, the composite price of a thousand board feet of framing lumber stood at $288, according to industry reporting group Random Lengths. That price was about $100 off its annual average for 2005, and a 29% slide from a year earlier when lumber hit its highest level this decade.

For builders, that’s welcome news after a two-year stint of volatile prices and availability among several LBM product categories. For Hall & House Lumber in Indianapolis, lumber’s free fall translates to framing packages for a 3,900-square-foot house (including garage) that sell for $3,500 less than they did last year. “That’s as low as it’s been in about eight years,” says Rodger Hall, secretary/treasurer of the three-location, $40 million operation. “We’re paying the piper now.”

In the “be careful what you wish for” category, both dealers and their builder customers are living the downside of recent materials price moderation. “High materials prices are tough [for builders], but they don’t want to be in a world that brings prices down,” says Markstein. “That usually means there’s less demand for housing, and that’s exactly where we are today.”

The cost of wood panels also is falling. By the week of Jan. 12, the composite price for panels sat at $273 per thousand square feet, about $100 less than it was just 10 months earlier and nearly $200 below its average in 2004.

As with most commodity products, prices for lumber and wood panels are set by supply-and-demand factors. In addition to lower demand, however, the supply side is also driving them down. Logs salvaged from the Gulf Coast and in British Columbia have mills working at near-capacity, while new and expanded OSB plants that came on line last year are up and running, as well. In addition, timber industries in Europe, Russia, and South America are emerging as legitimate players to supply domestic and global demand.

In fact, as domestic production continues to wane since being hampered by environmental restrictions on timber harvesting in the early-1990s, Markstein and other experts predict a higher percentage of framing lumber to be imported, possibly topping 40% by the end of the decade, from its current level of about one-third of the stock. And it’s not just coming from our northern neighbors. While Canada still provides about 86% of lumber imports, that share is dropping as quotas and duties on it kick in, opening the door to the global market. In fact, lumber from non-Canadian sources tripled between 2000 and 2005 (mostly from Germany and Sweden), taking market share from Canada and filling the gaps of U.S. demand.

The mix of import sources may shift even further as the U.S. and Canada continue to negotiate a fair lumber trade agreement. The latest version calls for fees and/or quotas on Canadian lumber when the composite price drops below $315, thus artificially inflating prices somewhat.

Similarly, the U.S. government recently imposed duties on Brazilian plywood, another cheap and plentiful source, once panel prices began to dip. Such restrictions do not (yet) apply to other import sources, however, and the dollar’s weakness against foreign currencies encourages importers to seek out the low-cost providers, thus keeping lumber and panels as low as they can go until housing demand perks up.