It’s Short Squeezes All the Way Down

One of the things we’re learning over the past year is the vulnerability of global supply chains.

There’ve been supply bottlenecks in lumber, semiconductors, shipping capacity and even labor, after Covid-19 sparked a dramatic underestimate in how much of these products and services would be needed. No one thought a global pandemic would coincide with a boom in consumer goods and a quick economic recovery, and so no one prepared for that by increasing capacity. Underinvestment is now sparking higher prices for sought-after goods, with lumber being the most notable example. Joe’s described this dynamic as a short squeeze in the real economy.

But what happens when short squeezes meet other short squeezes? Resolute Forest Products is one of the first sawmills to report this earnings season and it should have unveiled bumper revenue with lumber prices up 85% this year alone. Instead, the company reported earnings-per-share that came in below analyst expectations. Why? 

It seems the supply shortage in wood bumped into a supply shortage in transport. From the statement:

“The wood products segment generated operating income of $221 million in the quarter, a $93 million improvement from the fourth quarter, due to a $266 per thousand board foot increase in the average transaction price, or 44%, on strong lumber demand. But shipments fell by 50 million board feet because of seasonal shortage in rail cars and trucks, pushing finished goods inventory up by 46 million board feet, to 143 million board feet. The operating cost per unit (or, the " delivered cost ") rose by $49 per thousand board feet, or 13%, reflecting a higher variable compensation provision, higher fiber costs and the CEWS credits received in the previous quarter. EBITDA in the segment improved by $93 million, to $232 million.”

For more on lumber, check out our Odd Lots episode on why prices just keep going up.

©2021 Bloomberg L.P.

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