Threatened tariffs, announced tariffs, rescinded tariffs, pending negotiations, countervailing duties, a falling bond market, rising mortgage rates—the threats, drama, and uncertainty have not been good for the LBM industry. The uncertainty has led to risks of a different kind: slowing growth and rising inflation.
Fortunately, the industry scored a win in March when Canadian lumber and panel products were deemed U.S.- Mexico-Canada-Agreement-compliant and carved-out of the International Emergency Economic Powers Act’s 25% across-the-board tariffs.
Up next, the sixth administrative review of the countervailing and anti-dumping duties on Canadian lumber. When the final report is issued this summer, it’s expected to increase the combined duty from 14.4% to 30%+. Unlike tariffs, these are deposit-based duties that hit Canadian mills directly.
Yet to come, the Section 232 National Security Investigation. It designates lumber and other forest products as “strategic goods” on par with automobiles, steel, and aluminum. While the U.S. Department of Commerce has up to 270 days to complete its investigation, Fastmarkets’ baseline scenario anticipates implementation of 25% tariffs in the near term. Unlike previous duty measures, the National Security tariffs are likely to impact all non-U.S. suppliers, including European and Latin American producers.
As the industry braces for new tariffs, here’s what dealers can learn from the other extreme cycles of the 21st century —the 2006 boom cycle, 2009 bust cycle (Great Recession), and the 2021 COVID-19 cycle.
Risk management: To mitigate the risk of over-paying or experiencing a disruption in supply, expand your supply base. It pays to diversify. While North America has some very large producers, the industry remains highly fragmented, with many independent mills and wholesalers. Start making connections. Each grading agency has lists of the mills they certify. Lumber is mission-critical to your business, your customers; you need to expand and reinforce your relationships. Volatile commodities require active management. Here your acquisition strategy needs to protect margin, enhance ROI-lumber and your cash conversion cycle. Be strategic.
Supply vs. demand: The 2021 cycle (COVID-19) was supply driven, while the 2006 boom and 2009 bust cycles were demand driven. Traders across commodity markets/
exchanges know it is changes in supply, not demand, that dictate most price movements. Even a small imbalance in supply produces outsized movement in price. Tariffs will ignite a supply-driven cycle. Approximately 28% of the lumber consumed in the U.S. is imported, primarily from Canada.
Reach: During the 2009 bust cycle, buyers shopped an average of 7.5 vendors per purchase order awarded. During the 2021 COVID-19 cycle, buyers (using BuyMetrics) shopped on average 20.6 vendors per awarded PO, tripling (3X) their vendor contact as they reached to cover urgent need for wood. Expanding reach, particularly in volatile markets, improves the odds of: 1. sourcing supply-constrained material, and 2. purchasing from the vendor with lowest cost/best value. The result? Consistently shopping more vendors during Covid’s supply-driven cycle produced twice (2X) the CoG savings than the demand-driven cycles, 4.06% vs. 1.9-2.2%.
Price discovery: During the 2006 boom and 2009 bust cycles, the average spread between an awarded purchase order and the next-best offer was 1.9%–2.2%. During COVID-19, the gap doubled to 4.06%. With near-pure commodities, like lumber, your purchase tactics and process steps differ from other materials. What sets lumber apart is the requirement to undertake “price discovery” for every purchase. In the softwood supply channel every seller’s offer is made “subject to prior sale.” Market dynamics favor the fast and informed. Hint: automate this step with technology.
It pays to shop: Across all cycles, given a shot, secondary vendors surprise to the upside. During the COVID-19 supply- constrained cycle, they came through with hard-to-find product and 390 basis points in savings—a 5X increase from prior demand-driven cycles. In 2021, for every $10 million in lumber purchased, secondary suppliers added $390,000 (on average) to the buyer’s bottom line.
A summary of the report is available here.
