In the weeks immediately following the hurricane, Bill Justus, supply chain czar at David Weekley Homes, worked the phones, talking to national suppliers in an effort to mitigate any shortages and price impacts. To Justus' way of thinking, he'd prepared for the hurricane long before it ever happened—through relationship building.
“We don't change suppliers over a nickel,” says Justus. “We want a competitive price, but we also believe that we're in a stronger position than some. In times of strife, we like to think that our trade base will stay with us and try to protect us as much as possible.” Echoes Mark Hodges, senior vice president of corporate operations for Hovnanian Enterprises, “I would think the big public builders would try to leverage their relationships with the large material suppliers.”
As the Gulf Coast region began the process of drying out, purchasing heads and CFOs at big builders were busy trying to figure out what the years-long rebuilding initiative might mean to their costs and availability.
The near-term impact was harsh: The week of the hurricane, lumber prices jumped 9 percent, OSB leading the way with a 30 percent spike. However, those increases were largely due to the need for wood in protecting homes. And, notes NAHB economist Michael Carliner, there was a lot of “panic buying” as well in ensuing weeks.
TOUGH TO PREDICT If builders have a clue on real-dollar effects, most are mum, apparently too busy crunching numbers and waiting to see how this thing will play out. “We're convinced there will be an impact, both in price and availability that may affect construction schedules, but it's impossible to gauge,” says Hodges, “and the meter is how fast home building can occur.”
For now at least, time is on the supply chain's side. Unlike in the case of other hurricanes in places such as Florida, where rebuilding could begin practically as soon as the skies cleared, suppliers have a few months to figure out how they're going to meet the increased demand, with significant rebuilding work probably not beginning until the end of the year and after.
According to Carliner, plywood, OSB, roofing, and windows will be affected most. In addition, look for such products as drywall, concrete, and roofing to be in short supply. Much has been made about New Orleans-area ports receiving a large chunk of concrete shipments but, says Carliner, that's only a short-term issue.
One silver lining on the lumber side: The U.S. Department of Agriculture Forest Service says that the amount of trees damaged by the hurricane is enough to produce 295,000 single-family homes, not to mention another 9 million tons of paper and paper board. All that wood may not actually be harvested, of course, but no matter: Lumber can also be brought in from other countries, notes USB analyst Margaret Whelan, especially with the supply chain having the luxury of a few months to figuring out where it will go to keep its pipelines full.
“I'm more concerned about construction than about material costs, frankly,” says Larry Sorsby, Hovnanian's CFO. Sorsby has already experienced a shortage in a commodity you wouldn't automatically think of: electricity. By the beginning of September, he had already gotten notice from the Tampa electric company that because it had been asked to provide field staff for restoration work in Louisiana and Mississippi, Hovnanian should expect delays of eight to 12 week in obtaining electrical services for new home construction. Sorsby is monitoring the situation closely. “They could reach out to power companies anywhere in the country and ask for help,” he says.
THE FUEL FACTOR Another potential long-term impact could be fuel—not only in transportation costs passed off to builders, but in products that rely heavily on petroleum such as carpeting and insulation. The likelihood is great of carpet manufacturers slapping on fuel surcharges to their product, with rumors of one such surcharge possibly going as high as 30 cents a yard.