Hardwood Pallet Market

Summer has come and gone, and the pallet industry is still struggling with less than adequate supplies of low-grade hardwood. Weather has been a major factor throughout the lumber crunch. Just when it seems the weather will improve, it turns against the forest products industry again.

The Eastern Seaboard cannot seem to catch a break from the wet weather as an active hurricane season has continually drenched the area. Tropical Storm Bonnie and Hurricanes Charlie, Frances and Gaston all hit the Southeast, escalating concerns about log supplies for the coming winter. 

The persistent rain has a large portion of the forest products industry talking about getting ready for winter, but building a buffer inventory for winter is far easier said than done.

Although weather has been a constant problem, it has not been the only problem. Competition for raw material has been another hurdle for the pallet industry throughout the raw material crunch.

Industrial hardwood markets that compete with the pallet market for low-grade hardwood have been solid to strong in most markets and white hot in others. The railtie market has been particularly strong in all areas. Railties lead a long list of competing products that include flooring, framestock, steel mill blocking and board mats for oil roads.

Paper companies entered the fray and quickly became the largest concern to the pallet market because when it comes to competing with the paper companies for wood – it does not happen. Weather has been such a problem in the Northern States that paper companies have become aggressive in their procurement strategies. Pulp log bonuses have been issued in a number of Northern markets and choked off the supply to scragg and pallet sawmill operations.

Low-grade hardwood availability has been tight even in areas where log flows have not been so restricted. The strong industrial markets have kept low-grade hardwood supplies strained.

Undersized cants have become a common problem in many areas. Sawmills have been cutting farther into the heart of logs in an effort to maximize the limited log supply during the strong grade market. Pallet manufacturers report that waste factors are driven up significantly by the smaller cants. The problem is that smaller cants contain the same amount of defect as normal size cants.

Raw material prices held relatively steady throughout the summer after registering large gains in the spring. However, upward pressure was beginning to mount heading into autumn.

Pallet demand east of the Rockies has been solid to strong with more companies reporting strong activity. Some companies noticed a short lull in activity during the second half of August, but overall demand levels are good.

Pallet prices remain mixed in most regions. Every price increase is contested. Pallet suppliers have no choice when raw material costs go up other than to increase their selling price.

Western Pallet Market

The Western grade softwood market began its spring rally early. What began as an early rally quickly became a white hot market that continued through the summer. There were some brief reprieves, but the slower pace was mainly the result of buyers cautiously approaching the market due to uncertainty about the short term direction of the market.

Random length economy material has been in tight supply since the rally caught everyone off guard back in February. Availability was tight heading into the fall but not uncomfortably so. Economy material was available in varying degrees depending on what the buyer was seeking.

Random length 2x6 became close to impossible to find as the rally wore on. Finding any 6-inch wide material was difficult. Tallies that were heavier to short lengths were easier to find than true random length offerings. Buyers that could use the shorter length tallies were quick to purchase this somewhat affordable alternative.

Availability of random length economy 2x4 is better than earlier in the summer but is well below normal for early autumn.

Mill production volumes remained high all summer, often registering the highest numbers in several years. This led to a modest surplus of #3 and utility material. Pricing for this #3 and utility material was unusually stubborn despite a surplus that remained in place for five weeks, and price levels kept the material just out of reach of the pallet industry.

Pallet lumber buyers were able to restore lumber inventories close to normal by the end of summer.

The Labor Day holiday drove most lumber buyers to the sidelines. Mills were holding two to four week order files as the summer ended, but the slower pace of the market turned the phone traffic as mills initiated limited phone calls.

Pre-cut pricing in the West has found stable levels. Prices in the market covered a far wider than normal range. Some pre-cut prices seemed in line with random length pricing while some cut-throat pricing was curiously below the rest of the market.

Pricing on economy material from California mills moved at levels that compelled pallet manufacturers in California to shop closer to home first. This two-tiered pricing was common several years ago and has just begun to resurface. The trend creates a wide price range. Green random material has been more readily available than dry.

Pallet demand was steady in most Western markets. Most Western pallet suppliers view demand levels as good but not great. Unit numbers are typically up slightly over last year. Dollar volumes are up significantly over last year largely due to higher raw material costs.

Pallet prices in the West moved higher in tandem with the higher raw material costs.

Recycled Pallet Market

Recycled pallet demand east of the Rockies is the strongest it has been in many years. The improving economy is at the heart of the strong demand. While the new pallet market is also strong due to the improving economy, it has seen some ebb and flow. Contacts in the new pallet market cite this as the result of summer vacation lulls. The recycled pallet market has not seen any such lulls and grew increasingly strong throughout the summer.

Demand east of the Rockies is strong enough that pallet recyclers have begun to report difficulty keeping up. This has understandably put upward pressure on recycled pallet prices. The upward pressure varies from a bullish posture to strong upward price pressure. Price movements are evident in almost every region. The widespread nature of the price pressure is a strong indication of just how strong recycled pallet demand has become. It is not unusual for demand to be outpacing supply in many markets east of the Rockies.

That was the good news. The other side of the coin is a core supply situation that ranges from tight to critical in virtually all Eastern markets. Supplies of cores have been tightening all year. Supplies began to tighten very early in the year, but recent trends reveal a problem that intensifies by the week. Although there are no crises to report, core supplies are approaching critical levels in a number of areas, especially for #1s.

As with the improving demand, the dwindling core supply can be traced back to the improving economy. Distribution centers bolstering inventories to accommodate the stronger sales become consumers of pallets; normally they would be major suppliers of pallets, but now they are low demand customers.

The current supply-demand scenario harkens back to the market of the late 90s, when demand was solid to strong and core supplies were hand-to-mouth.  The only long term factor that bolstered core supplies was the sluggish economy. Demand was down and available core supplies were heavier due to inventory reduction at retail distribution centers.

The percentage of #1 GMAs in the inbound core supply has dwindled in recent months. This creates a double whammy: fewer inbound cores, and a smaller percentage of the restricted flow is #1s.

Core supplies in the West are in better shape than the East. As with the Eastern markets, there are problems with the supply of #1 GMAs. Core inventories in the West are losing ground due to strong seasonal demand. The strongest core supplies in the West are in the Pacific Northwest.

Reports of inbound supplies of #2s vary with most contacts reporting inbound #2 supplies that are well below expectations. The percentage of #2 GMAs in the inbound mix is growing. This is a clear indication of the declining quality of the whitewood pallet pool.

Customer service has become an issue. Contacts report that special requests from customers are at an all time high. Services that used to be gravy money for the recycler are considered part of the normal package in today’s recycled market.

Higher quality recycled pallets, such as warehouse grade or premium #1s and ‘new life’ or ‘combo’ pallets -- remain in high demand.

Last minute orders are problematic. The tight supply and strong demand are not a good mix for last minute orders, but customers are not concerned about it.