(Photo courtesy of Georgia Pacific)

Contractors and homeowners searching for plywood to protect windows and buildings in the path of Isabel last week were hit by sky-high prices, as the hurricane became the last in a sequence of converging factors pushing demand beyond existing supply.

Spot market prices of plywood have more than doubled since mid-May. For example, one thousand sq ft of 1�2-in. southern pine cost $545 on Sept. 12 compared to a springtime price of $253, according to Crow Forest Products Market Report, a Portland, Ore.-based publication that tracks mill prices for wood products. Crow also reports that other types of panel, including oriented strand board (OSB), are experiencing similar price increases.

The main culprit for the current supply-demand imbalance is the red-hot housing market. Residential construction accounts for roughly half of all demand for structural wood panels. The resulting surge in demand for plywood has both U.S. and Canadian mills running at nearly full capacity. During July and August, plywood producers were operating at a capacity utilization rate of 97%, according to the Engineered Wood Association, Tacoma, Wash. However, the roots of the shortage run deeper than the record number of housing starts.


Going into the summer construction season, "we had low inventory to start with because we had cut production," says Melodie Ruse, spokesperson for Atlanta-based Georgia-Pacific. Other companies, in an effort to bring supply in line with demand, had taken similar measures. Some even closed some mills after years of over-supply and depressed prices.

"Over the last 20 years, the entire building products industry has gone through a number of cyclical periods. We had finally reached a point where supply was equal to demand," says Frank Mendizabal, spokesperson for Weyerhaeuser Company, Federal Way, Wash. And then the perfect storm hit.

The historical over-supply had encouraged builders to fall into a pattern of just-in-time buying. This year, a wet spring delayed the construction season and "everyone came in and bought at one time, depleting the already low inventories even further," says Crow’s publisher, Ken Tennefoss.

At the same time, weather across the country continued to restrict equipment access to forests, reducing the supply of raw materials. The wet spring turned into a wet summer in the South and Southeast. In the West, an atypically dry summer resulted in widespread forest fires, putting yet another kink in the supply chain.

Some analysts believe that the straw that broke the camel’s back was an unexpected order by the U.S. military of 20 million sq ft of plywood to support its troops in Iraq and to restock supplies that were drawn down by the war effort. "They did not buy a tremendous amount when you look at the total industry output, but combined with other factors it caused prices to go up," says Mendizabal.

Water Projects Help Prices Rise
By Tim Grogan with Janice Dixon

The water supply market is still one of construction’s bright spots with work levels through the first seven months of the year running 6% ahead of the same period in 2002, according to the U.S Dept. of Commerce. Strong demand and rising input costs have pushed prices of ductile iron and reinforced concrete pipe steadily higher over the last six months (see p. 30). Prices for 8-in.-dia ductile iron pipe increased 5.2% in the third quarter after jumping 7.1% during the previous quarter, according to ENR’s 20-city average price. RCP prices have increased 4.2% in the last six months.

High-density polyethylene (HDPE) pipe is being specified more frequently and its petroleum base makes prices volatile, says Thomas Olesczuk, vice president of Tully Construction Co., New York City. He says suppliers have warned that HDPE prices could go up as much as 20% in the coming year.

PVC water pipe price peaked earlier, starting the year 13% above 2002’s level. But in the third quarter, prices for 8-in.-dia PVC water pipe fell 4%, leaving prices 3.9% higher than a year ago.

However, many economists doubt that the military purchase could so severely impact prices in an industry with the capacity to crank out 19.3 billion sq ft of plywood a year. "I think that [military procurement] is being used somewhat as an excuse," says Michael Carlinger, an economist with Washington, D.C.-based National Association of Home Builders.

"The military purchases have be-come somewhat of an urban legend," agrees Paul Jannke, vice president of wood products for Resource Information Systems Inc., a Bedford, Mass.-based forecasting firm. "The real culprit is definitely record demand and inadequate inventories."

Just as plywood prices reached record levels in late summer, Hurricane Isabel came churning along the Atlantic Coast. Given the already low supply, some towns reportedly did not have any plywood left to sell. Even before the storm, back orders for December delivery were already being taken by some suppliers, says Tennefoss.

As winter approaches, prices are likely to begin declining, assuming the market is not hit with any new surprises. "If we have a mild winter and builders can work, you could see prices stay at these levels for a while," says Tennefoss.

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Summary: Cheap Money Heating Up Costs
Indexes: Tight Markets Squeeze Margins
Equipment: Fighting Rising Insurance Rates
Labor: Unemployment Fails to Dent Wage Hikes
Insurane: Pressure Grows on Workers' Comp