Are lumber mills simply ripping people off now?
I read an article today where a prominent figure in the US housing market basically cried foul over the price of lumber in the US. He was basically arguing that the cost of American timber should be going down as a result of the trade war.
Before I dive in, I honestly don't know the specifics.
But, I do have a good grasp of the generalities. The argument in favor of tariffs is that, in theory, by choking out foreign competitors American producers will be able to increase output. And an increase in output should result in a decrease in prices.
The theory isn't REALLY all that bad. It generalizes the ever loving crap out of things, and it isn't actually a generally applicable rule. But, it should work out, in the mid term. The longer term is driven by a lot of other factors so I won't make and predictions there.
But, that is EXACTLY the problem. We're not IN the "mid term". This trade war is FRESH. Lumber producers cannot, necessarily, instantly ramp of production. Nor, can they necessarily do so at a fraction of the cost. If this drags on for a few years. Then sure.
Increasing output requires machinery, facilities, and skill. ALL of those are expensive. Add to it, that this trade war has only served to make the American market more volatile. Not just for investors, but also, those working in the industry.
Let's say I own a mill. I've been producing at below capacity, but probably not MUCH below capacity. If I were operating WELL under capacity it would mean I was paying mortgages or leases on land/buildings I don't, machinery I'm not using and employing people who aren't working. People don't do that. Especially not in a industry which feels threatened by the cost of cheaper imported goods. They are already running on razor thin margins.
The size of the tariffs the US imposed are unprecedented and MASSIVE. This would have created a MASSIVE surge in demand for domestic lumber.
Now, still pretending I own a lumber mill in the US. Will these tariffs REALLY last? And how long? How much can I safely expand? And how quickly? To any smart business owner, the answers to ALL of those questions are going to be bad ones; "I don't know", "I don't know", "probably not much", and "slow".
In other words, if I go take on millions of dollars in debt to buy land and machinery and the price falls through the floor or the tariffs are repealed, then I won't be able to sell the land or the equipment let alone pay for it.
Even if I'm bullish on the whole trade war and actually think it will resurrect this industry. There are still problems. If I want to increase capacity by a substantial volume, I very likely need all three of those things I said I needed before. Land, machinery and people.
Land transactions don't close fast and are not always quick to find. Not mention, they may require massive amounts of financing. Machinery will be specialized and probably hit similar barriers as land. And people power, can probably be found quickly, but the learning curve here is important. A new worker may be as much as 50%-75% slower than an experienced employee and take years to get up to speed. In that intervening time, your cost to produce actually goes up.
So, whether companies are trying or not, the short term impacts SHOULD be an increase in cost. And given the size of the tariffs, I fear that American industries dependent upon lumber are going to shocked to find that the prices are probably nowhere near as high as they are going to go before they start coming back down.
In short, yeah, lumber makers probably are resting on their laurels by and large and getting rich off of the increased demand. But, it doesn't necessarily mean they are mean or greedy. The market has just been made incredibly unstable. It's future incredibly unclear. I suspect many might want to wait as long as the next presidential election before moving. That will give them time to see the longer term impacts of the trade war, give them some time to build up capital, and if Trump is re-elected, then it will give them at least a 4 year runway to work with.
I'm sure companies will move before the next election. But, definitely, I think most are seeing the increase in demand as a time to build capital and see what the trajectory looks like when things stabilize a bit.
Before I dive in, I honestly don't know the specifics.
But, I do have a good grasp of the generalities. The argument in favor of tariffs is that, in theory, by choking out foreign competitors American producers will be able to increase output. And an increase in output should result in a decrease in prices.
The theory isn't REALLY all that bad. It generalizes the ever loving crap out of things, and it isn't actually a generally applicable rule. But, it should work out, in the mid term. The longer term is driven by a lot of other factors so I won't make and predictions there.
But, that is EXACTLY the problem. We're not IN the "mid term". This trade war is FRESH. Lumber producers cannot, necessarily, instantly ramp of production. Nor, can they necessarily do so at a fraction of the cost. If this drags on for a few years. Then sure.
Increasing output requires machinery, facilities, and skill. ALL of those are expensive. Add to it, that this trade war has only served to make the American market more volatile. Not just for investors, but also, those working in the industry.
Let's say I own a mill. I've been producing at below capacity, but probably not MUCH below capacity. If I were operating WELL under capacity it would mean I was paying mortgages or leases on land/buildings I don't, machinery I'm not using and employing people who aren't working. People don't do that. Especially not in a industry which feels threatened by the cost of cheaper imported goods. They are already running on razor thin margins.
The size of the tariffs the US imposed are unprecedented and MASSIVE. This would have created a MASSIVE surge in demand for domestic lumber.
Now, still pretending I own a lumber mill in the US. Will these tariffs REALLY last? And how long? How much can I safely expand? And how quickly? To any smart business owner, the answers to ALL of those questions are going to be bad ones; "I don't know", "I don't know", "probably not much", and "slow".
In other words, if I go take on millions of dollars in debt to buy land and machinery and the price falls through the floor or the tariffs are repealed, then I won't be able to sell the land or the equipment let alone pay for it.
Even if I'm bullish on the whole trade war and actually think it will resurrect this industry. There are still problems. If I want to increase capacity by a substantial volume, I very likely need all three of those things I said I needed before. Land, machinery and people.
Land transactions don't close fast and are not always quick to find. Not mention, they may require massive amounts of financing. Machinery will be specialized and probably hit similar barriers as land. And people power, can probably be found quickly, but the learning curve here is important. A new worker may be as much as 50%-75% slower than an experienced employee and take years to get up to speed. In that intervening time, your cost to produce actually goes up.
So, whether companies are trying or not, the short term impacts SHOULD be an increase in cost. And given the size of the tariffs, I fear that American industries dependent upon lumber are going to shocked to find that the prices are probably nowhere near as high as they are going to go before they start coming back down.
In short, yeah, lumber makers probably are resting on their laurels by and large and getting rich off of the increased demand. But, it doesn't necessarily mean they are mean or greedy. The market has just been made incredibly unstable. It's future incredibly unclear. I suspect many might want to wait as long as the next presidential election before moving. That will give them time to see the longer term impacts of the trade war, give them some time to build up capital, and if Trump is re-elected, then it will give them at least a 4 year runway to work with.
I'm sure companies will move before the next election. But, definitely, I think most are seeing the increase in demand as a time to build capital and see what the trajectory looks like when things stabilize a bit.
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