Wood Cuts - Aug/Sep 2012

By Michael Martin

At the National Wood Flooring Association’s 2012 Wood Flooring Expo, held in Orlando this past April, there was an optimistic mood of renewal within the industry. Contractors were reporting that, for the first time in several years, they had work booked for several months. Distributors were reporting increased sales, and manufacturers were reporting more production. This optimism appears to align with recent sales reports from industry experts, which show the turning of a corner after several years of market decline.

How does this trend translate to raw material pricing? According to Market Insights/Torcivia’s 2012 US FLOOReport, material costs dominated wood flooring production costs in 2005 at 57%. Of these material costs, hardwood lumber represents 74% of the cost of all materials consumed. The report further indicates that raw lumber costs vary significantly based on weather, demand, and political conditions.

Weather affects the ability of loggers to harvest trees because wet conditions prevent trucks and other heavy equipment from getting to the trees they need to harvest. Most hardwood forests are accessible via dirt roads, which are often impassible during wet weather.

Demand is based on several factors, including production of furniture, cabinets, and pallets, as well as housing starts and remodeling.

Political conditions affect production and prices as well, and the Lacey Act in particular has impacted the import of tropical hardwood species into the U.S. market. This translates into potentially more production for U.S. domestic species.

Despite the potential for increased production, many industry experts report that production has declined considerably, from about 12 billion board feet at its peak in 2005 to about six billion board feet today. At the same time, the average price per square foot has dropped as well, from about $2.39 in 2004 to $1.96 in 2011.

So what is driving this trend? First, sawmill production has been slow to ramp back up since the housing market declined. According to the Hardwood Market Report (HMR), limited capital has prevented logging contractors and mills from investing in hardwood timber tracts. In addition, the extended downturn in business has reduced the number of qualified logging contractors available to process purchased timber. HMR further reports that due to a lack of confidence in future business conditions, many suppliers and end users have controlled output and purchases. However, HMR reports signs of improvement as well, stating that economic conditions are just beginning to improve and that there are signs that the markets are gaining traction and demand is increasing. Specifically, HMR reports that residential construction has gained momentum, which has spurred finished goods manufacturing and the need for additional raw materials.

Hardwood flooring industry leaders agree. Mike Millard, general manager of operations with McMinnville Manufacturing Company in McMinnville, Tennessee, says that the biggest issue affecting raw material pricing is the loss of so many sawmills. “It is hard for the bigger sawmills to make it this day and time because of the large overhead they have to carry,” says Millard. “You do see a lot of the smaller sawmills in business, but this is primarily because the cross tie market has been very good. If not for the strong cross tie market, we would really be in trouble, as far as lumber supply is concerned.”

Millard also believes that lumber prices are up from where they should be, but that “flooring prices have not come up at the same pace.” Millard says that this makes it hard for unfinished manufacturers of hardwood flooring to make a profit compared to flooring manufacturers who can “add value to their product by adding a factory finish.”
Don Finkell, president of Anderson Hardwood Floors in Clinton, South Carolina, shares Millard’s assessment that the loss of mills is affecting raw material prices. “There are fewer saw mills in business,” says Finkell, about “half of what was there before the recession.” Like Millard, Finkell says the industry is seeing some increases in raw lumber pricing despite business being down. “Fuel costs have added to [lumber prices for] hauling both logs to the sawmills and green lumber to the flooring mills,” says Finkell. Finkell also believes that new home construction is picking up and that the industry will see a rapid rise in prices when housing recovers.

At Hassell and Hughes Lumber Company in Collinwood, Tennessee, vice president Bob Haggard says that due to the weak US housing market, “flooring mills have been forced to curtail production to survive. We ran three shifts during the prime. We now run one. If we run three, we pay more for lumber and sell flooring for less. Translated, the more we run, the less we make.” Haggard further states that mills have gone away because “they simply could not make a profit. Prices have risen only a small percentage and cost has risen a ton.”

Four hundred miles away, in Johnson City, Tennessee, Mullican Flooring’s president, Neil Poland, says that for solid hardwood flooring, “lumber prices versus last year have decreased about the same percentage as the flooring selling prices have dropped,” while for engineered flooring, “the veneer prices for domestic face, back and core veneer have increased in 2012 versus 2011,” while engineered flooring sell prices have remained the same. Poland agrees that fuel costs have impacted lumber prices but points out that “fuel prices have increased worldwide, which has helped U.S. manufacturers compete with foreign imports.” He concedes, however, that logging costs have increased not only due to fuel costs, but also due to a shortage of loggers. Like his colleagues, Poland also believes that “there is a risk of lumber prices increasing rapidly if the housing market improves significantly as the number of operating sawmills have been reduced by more than 50% since 2007.”

Mannington Wood Floors’ Dave Voy, in Salem, New Jersey, adds that most of the loggers who have gone out of business “will not return even if the economy recovers because they have moved into alternate lines of work.” Voy also believes that mills will widen their typical sourcing areas for wood. This means they will be hauling raw materials greater distances, which will drive up costs. Looking beyond lumber exclusively, Voy also points out that petroleum pricing will directly impact raw material pricing for adhesive and finish manufacturers.

Tommy Maxwell, president of Maxwell Hardwood Flooring in Monticello, Arkansas, sums up the sentiments of the group that the rebounding housing market could have the most potential impact on the industry. “Lumber will take a short-term spike when we see a better housing market,” says Maxwell. “A good housing market will create a serious lumber shortage and prolonged price increases.”

On the positive side, housing may already be on the verge of turning around. According to the U.S. Census Bureau, new residential construction is showing improvement, which is meaningful in both overall growth and as it relates to the solid wood flooring industry. The non-adjusted estimates of single-family housing construction year-to-date are up 18.9% for starts, 17.5% for permits, and only 3.4% for completions. The margin between starts and completions is a measure of growth potential, and the gains in permits are essential to help keep starts and completions energized.

Overall, lumber prices have risen drastically during the past few years and show no signs of declining in the foreseeable future. With the housing market on the mend, and fewer sawmills available to meet increasing demand, the cost of raw materials is as high as it has ever been and is poised to rise even more. Sooner or later, those costs will have to be passed on to the end user.

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