Overall Lumber Picture

            Remember when pallet people showed little to no concern with what happened outside of our borders? Hardwood lumber for building new pallets typically came from sawmills down the road. More often than not, you could easily enjoy breakfast with a hardwood supplier. Supply was not a major concern most of the time, although we have had periods when log supplies, and hence lumber supplies, were very tight. Tight supply periods usually did not last over a year or so. They resulted from extremely wet periods when logging conditions were terrible. We had seasonable times when supplies were tight, but planning for these periods usually allowed both the mills and pallet plants to adequately supply their customers. That was before. Today is today!

            The softwood picture is somewhat different. In the southeastern part of the U.S. and Canada, most softwood comes from local or regional mills. In the western pallet markets, softwood sometimes ships as much as a thousand miles or more to find its final home. U.S. softwood supplies come from either U.S. or Canadian mills.

            Today we can no longer ignore what is happening beyond our shores. We have to deal with phytosanitary issues in our products, a relatively recent development that promises to grow in market share. But now we are starting to observe changes in our lumber supply options as well.

Weather Affect

            First, examine conditions surrounding our local hardwood suppliers. From the fall of 2002 throughout most of 2003, unusually heavy precipitation made logging conditions very difficult in most of the eastern half of the country, particularly in the Ohio Valley and Northeastern states. Throughout last summer and into the fall season, pallet people were unable to build inventories for the coming winter and spring seasons. They were often running with just a few days of inventory, not the month or two they like to build for the coming winter season. The winter season is often difficult to impossible for logging. The northern tier of states offers a possible exception. If a hard freeze makes the forest floor solid, loggers in the North may be able to build inventories during even harsh winter conditions to prepare for the coming spring thaw season and its road posting period. But this year the solid freeze was late, particularly in the Ohio Valley and Northeastern regions. So, we are heading into the heart of this winter season with the most difficult hardwood supply conditions ever experienced by most pallet companies. But this is not the end of the story.

Hardwood Markets

            The supply problems experienced by hardwood pallet manufacturers are not caused just by weather conditions. There are several other contributing factors and influential hardwood markets. Some of the changes appear to be permanent; in fact they may intensify in coming years. But some may slack off over time. Certainly the weather factor, which is undeniably significant, may lessen its grip as the year progresses. But the bottom line of hardwood markets has become international much faster than most had expected. In addition, competing markets for the low-grade hardwood used by our industry have been the most active of all the hardwood markets.

            I hope the overview provided below will be of value. It is a foretaste of a white paper on hardwood supplies that I am writing for my pallet manufacturing friends. It will be written to speak to the thousands of companies that depend upon hardwood pallets. These pallet users need to have a dependable source of unbiased information about today’s pallet hardwood market. This white paper analysis will be available free to subscribers of the Pallet Profile Weekly. Others can purchase a copy. Contact Jeff at 804/550-0323 for your copy of the complete white paper.

Grade Hardwood — The grade hardwood market in 2001 and 2002 was anything but exciting. Many sawmills struggled to find customers. Hardwood exports to traditional markets often had to compete with lumber sources that had not once been a factor. Many sawmills either reduced their production or closed their doors permanently due to market factors. The recession took its toll. Equally if not more important, the flight of hardwood furniture manufacturing to the Pacific Rim (mostly to China) took a major bite out of the demand for domestic grade hardwood. Some hardwood was exported to China, but certainly not enough to compensate for the volume lost due to the flight of furniture manufacturers.

            Hardwood sawmillers often wonder how furniture manufacturers can ship material halfway around the world, make products, then ship them back to the U.S. and undersell domestically manufactured furniture. People often point to labor savings, but I believe that more modern plants in China may have created an unfair comparison. Many other costs, however, must be less, possibly much less, in China than they are here. Of course, environmental and regulatory issues in the U.S. can have a choking effect when compared to China.

            One of the ironic twists in this whole scenario is the fact that more and more hardwood logs are being exported. So, it is not just losing business to manufacturers halfway around the world. They are buying our logs at an increasing rate to manufacture hardwood products and ship them back to us. I would have once thought this to be impossible, but it appears to be happening.

            Last fall I received an e-mail from Randy Brown of Ongweoweh Corp. Randy put his finger on this problem when he stated, "One of the issues I’ve heard recently relates to log supply. I have heard from two sawmills that they lost bids to off shore companies (China and South America). They were outbid by 15%. Logs are leaving the states by the boat load. This scares anyone I speak with."

            The bottom line is that a significant part of the furniture markets has moved off shore, much within just the last few years. This appears to be a trend that is not likely to be reversed soon. This impacts the pallet industry because our hardwood raw material supply depends heavily on sawmills’ low-grade output. When mills close or have to fight for logs, it both increases lumber costs and causes supply problems. Our industry has historically depended very heavily on the hardwood sawmill industry.

Hardwood Flooring — One of our two biggest competitors for low-grade hardwood supplies is the flooring industry. Over the past century hardwood flooring production has gone through some wild swings. It grew from less than 50 million bd.ft. in the early 1900s to over 500 million by the late 20s. The depression saw flooring shipments drop to under 150 million bd.ft. within just a few years, only to recover to over 500 million by the start of WWII and then quickly recede to under 200 million bd.ft. By 1950 the market had recovered to hit its first one billion bd.ft. year and held fairly strong into the mid 60s. When borrowers could put a five year wear carpet on a 30 year mortgage, wall-to-wall carpeting grew in popularity at the expense of hardwood flooring. Again, by the late 70s volumes dropped to below 100 million bd.ft. Starting in the mid 80s, numbers started to grow to well over 600 million bd.ft. today.

            With the kind of hardwood volumes required by the flooring market, it is not surprising that the pallet industry has to fight with flooring for material. Imports are putting a relatively new wrinkle into the flooring picture. George Barrett, editor of the Hardwood Review Weekly wrote, "As with most other manufacturing segments of the hardwood industry, we expect hardwood flooring imports to grow and exports to decline. Where once flooring was thought to be too low in value for offshore producers to compete, steady, strong flooring demand and rising domestic timber and lumber prices have changed the equation."

            At last year’s NWFA Expo, imported products occupied much of the exhibit space, including Africa, Romania, Sweden, Italy, Russia, Brazil, Paraguay, Australia and China. Don’t forget Canadian imports. Nontraditional species, varying colors, and engineered floors are all factors in today’s flooring industry. It seems that flooring, like many other hardwood markets, is going through many changes. While the flooring industry continues to grow, it is possible that imported material will help satisfy more future demand. For the time being, however, the flooring industry stands in front of us in the lumber supply line.

Railties — Railties are unquestionably one of our biggest hardwood competitors. Since ties require the center of a log, they compete directly for the supply of pallet cants. According to the production and inventory figures of the Railway Tie Association, the number of crossties and switchties produced each year is between 15 and 20 million ties. While this number pales when compared to the over 100 million ties that were used in some years in the early part of the 1900s, railtie demand has been relatively steady for many years. While the demand is not growing like that of flooring, ties continue to take what they need from the supply chain. Tie buyers can always outbid the pallet industry when push comes to shove. So, pallet manufacturers have no choice but to compete with both flooring and crossties when hardwood supplies are tight.

Hardwood Pallet Market — We are in the middle of the most difficult hardwood supply situation in the history of the pallet industry. So, what can hardwood pallet manufacturers do to take care of their customers when enough hardwood lumber is simply not available? Several different approaches are taken.

            First, during this and past times when hardwood supplies were tight, many pallet suppliers look to softwood lumber as a substitute for hardwoods. Different pallets have different applications and strength requirements, so some lend themselves better to species substitutions. But not all pallet specifications can be changed that easily. Pallets can be engineered by using the Pallet Design System program to compare different species.

            Over the last two decades, used pallets, combo pallets, and pallets manufactured from used lumber have taken an increasing percentage of the pallet market. Since new hardwood pallet prices are going higher to cover increasing hardwood costs, more pallet users are willing to consider pallets from the recycling stream. Unfortunately, the hardwood core supply is extremely tight as well. As the recycling industry grew, pallet cores got progressively more difficult to locate. With the exception of a short lived improvement a few years ago, supplies remain hard to find. Thus, recyclers and manufacturers may not be able to satisfy unfilled demand from the recycling stream.

            Before closing, one final raw material source must be mentioned. It may seem strange for an industry that has supplied its lumber needs from local sources to think globally for raw materials. With the exception of Canadian lumber coming into the U.S. (mostly softwoods), we have supplied virtually 100% of our pallet lumber needs from domestic sources. But the forest products industry is becoming more global every year. It may be difficult to ship finished pallets long distances, and costly to ship scrap and waste, but precut material may be shipped long distances more effectively.

            At this writing, not much pallet material is coming from off-shore sources, but the trend has begun. Limited quantities of lumber have come into the U.S. from South America, including Chile, Uruguay, and Brazil. Eucalyptus plantations are reaching maturity levels, providing a deciduous (hardwood) lumber species from South America. Radiata Pine plantations are supplying softwood for pallet stock as well, and Southern Yellow Pine plantations are maturing.

            To my knowledge Russian softwoods have not yet entered the U.S. for pallet stock, but they are starting to appear for higher grade uses. Many experts are predicting that Russian lumber will be a rapidly growing supply source for North American lumber needs. Will that include pallets some day? Nobody knows for sure.