Hardwood Pallet Market

Weather and market forces have combined to put a double whammy on low-grade hardwood supplies east of the Rockies. Logging conditions have been poor in most areas, although there has been modest improvement in the South. Weather conditions seem to improve in one area just long enough to provide breathing room while worsening in another area.

The less than desirable weather has not been the only challenge for the pallet  industry. The shift of industrial hardwood markets has been a large factor, also. Low-grade hardwood is in high demand. The strength of industrial hardwood markets has been a growing problem for the pallet industry throughout the current hardwood shortage.

Railtie markets are strong and are projected to remain strong for as much as five years. The log shortage has placed a premium on pulp logs. Flooring has been a very strong market, too. Log and lumber inventories are thin in most areas. Pallet lumber buyers have more competition for raw material than ever, and each competing market can easily afford to outspend the pallet industry.

Given these conditions, it is no surprise that low-grade hardwood prices have been rising in recent months and remain bullish in nearly every region.

Pallet demand east of the Rockies has been solid. Demand is better than the industry has experienced since the economy began to falter in February 2000.

Pallet prices have continued to move up but have not kept pace with the rising cost of raw material. Every price increase is contested, but resistance is not as strong as it was earlier in the lumber supply crunch. Many pallet suppliers feel they have no choice.

Western Pallet Market

Last year the spring run in the softwood grade market did not start until late summer in the West. This year the market jumped the gun by getting into high gear early in February.

Winter price concessions, which pallet lumber buyers usually depend on for building inventory, never materialized. In fact, the surpluses that normally fuel the concessions never materialized. Suddenly pallet suppliers found themselves with thin lumber inventories while lumber was in short supply. Lumber buyers jumped into the market, and prices spiked dramatically.

The dramatic price increases caught off guard almost everyone dealing with industrial softwood. The surprise shortage brought an instant reaction from the market; everyone, from lumber buyers to wholesalers and sawmills, was talking his position. The buyers’ spin was that it was a temporary spike. Sawmills reported strong order files and proclaimed the spring rally was arriving early. Wholesalers were split and opted to trade back-to-back without taking substantial positions.

Supplies of industrial softwood were nearly nonexistent. All of this took place while lumber buyers waited for traditional winter surpluses. The shortage left even the most savvy industry veterans scratching their heads.

Economy prices have increased steeply in recent weeks. Quoted prices cover a wide range. Economy 2x4 prices were far more bullish than economy 2x6 prices. Short length tallies and economy wides provided the only bargains in the market, but even then savings were modest.

Canadian cut stock suppliers were pleased with any sort of change in conditions as 2003 brought difficult conditions for sellers of pre-cut. Random length prices rose faster in the U.S. than Canada, providing a little relief for cut stock suppliers.

Pallet demand in the West has been mixed. Activity prior to the lumber rally was mixed with some companies very busy while others were in the midst of the winter pallet demand doldrums. Even companies on the slow side of the demand cycle found activity to be ahead of last year’s numbers. Many companies that were busy heading into the rally saw demand slow dramatically when higher lumber prices prompted pallet price increases.

Recycled Pallet Market

In the recycled pallet market, core supply trends have flip-flopped. Core supplies were slightly tight during December and were bolstered in January by the post-holiday influx of cores from the retail sector. The trend reversed in February, when core supplies were poor by nearly all accounts. Even the best supplies were modest by traditional standards. Most contacts indicated the post-holiday influx of cores was weaker than expected -- the main reason for the two quick turnarounds.

Inbound core supplies for #1 GMAs dipped, leaving supplies tight in most markets. Core supplies in the West were healthier than east of the Rockies, but core supplies in the West were tightening. The stronger supplies in the West appeared to be more the result of lackluster demand than any supply improvements.

Inbound #2 GMA core supplies did not register much change. Supplies of #2 GMAs were in decent shape mainly because they are a dominant part of the inbound mix in most markets. Some markets reported an abundance of #2s while others struggled with shrinking supplies.

Recycled pallet demand has been solid to strong in most markets east of the Rockies. Activity levels have been good but not up to levels that were common late in 2003.

The strength of demand in the recycled pallet market east of the Rockies has been largely based on stronger business from regular customers. Raw material shortages in the new pallet market also have been a factor. The rising costs of hardwood have driven new pallet prices higher. As a result, some customers that normally would not consider recycled pallets have made the switch.

Pallet demand in the Western recycled pallet market finally began to pick up in early February. Demand in the West remained mixed, but a higher percentage of the hit-and-miss demand was on the busy side of the mix. Activity in California improved quite a bit. Demand levels in the Pacific Northwest registered modest improvements as well. Agribusiness demand in the Yuma market was solid to strong. Crop volumes were too heavy for the market’s own good, which forced demand to dwindle early. Higher cut stock prices in the West made this competitive market even tougher.

Pricing in the recycled pallet market continued to drift lower. This trend is somewhat disturbing, considering that core supplies are tight and pallet demand is solid to strong. Prices generally have been stable, but the soft posture defies usual supply-and-demand patterns.

Pallet recyclers report that much of the improved business levels have been last-minute orders. Orders with zero lead time have become almost commonplace in the recycled pallet market.

Premium or warehouse grade #1s were again the strongest demand item in nearly every region. Warehouse grade #1s have also been the most common item in zero lead time orders.

(Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for Pallet Profile Weekly and the Recycle Record, the only newsletters dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly or the Recycle Record, call (800) 805-0263 and ask for Jeff.)