Hardwood Pallet Market

Low-grade hardwood supplies east of the Rockies are displaying mixed trends, depending on the location. Some areas have experienced modest relief but most continue to struggle to maintain a working inventory.

The few areas that have seen some relief have gained because of the soft hardwood grade market. The most notable shifts in the hardwood grade market have come in flooring and No.2 common and No. 3 common oak. The precipitous fall for No.2 common and No. 3 common oak has changed the sawing habits of many sawmills; they are less inclined to saw so far into the heart of the log. The result is that more cants are being offered out of grade mills.

In addition to the retreat of No.2 common and No. 3 common oak, flooring markets are a factor in some areas. The flooring market continues to enjoy strong activity, but sawmill production has outpaced demand. This has resulted in more 4/4 material in some areas.

Although these factors are providing slightly more material in some areas, pallet grade hardwood remains painfully tight in many places. Some regions have seen little or no improvement. Some have watched low-grade hardwood supplies decline from poor to critical. Most of the pallet industry continues to struggle with less than adequate low-grade hardwood supplies.

No area of the country has inventory levels that are close to normal. Even in locations that managed to register improvements, the gains have been minimal, leaving the supply picture questionable.

Weather continues to be a major factor hindering the pallet industry’s efforts to build any sort of an inventory. This is particularly disconcerting in some Northern states. Some of these states have been in the areas of improvement mentioned earlier. This is the time of year where pallet manufacturers in the Northern states are looking to lay in a buffer inventory for the spring thaw. As spring approached, roads were already posted for weight restrictions, bringing on the official onset of the spring thaw season.

Despite heavy inventories in the flooring industry, industrial hardwood markets remain solid to strong. The robust activity levels continue to be strong competition for low-grade hardwood that would normally find its way into the pallet market. The railtie market has been particularly strong. Framestock, steel mill blocking and board mats for oil roads are also solid markets.

Paper companies have been aggressive for quite some time due to weather concerns. Pulp log bonuses have been in place for months in some areas. The bonuses are significant enough that loggers do not bother sorting logs, and paper companies receive the lion’s share of the log supply. Pallet operations that work with round wood and scragg mills find it nearly impossible to buy logs in these conditions.

Raw material prices, which had held fairly steady for some time, once again became decidedly bullish.

Pallet demand opened the year slightly below the pace of the end of 2004 before catching its stride. Pallet suppliers still are not as busy as they were late in 2004 but are happy with the current levels. Some contacts felt that they were stretched too thin by the earlier frantic pace.

Pallet prices registered upward movement on the strength of demand and upward pressure of raw material prices.

Western Pallet Market

The Western grade softwood market looks like deja vu all over again. Much like last year’s frantic run, the grade market once again has skyrocketed in February. Random length economy quickly became a target of remanufacturing facilities that are buying industrial softwood to upgrade to studs, web truss and other value-added products

The difference between this year’s run and last year is that the pallet industry was more prepared. Inventory levels were in better shape this year but the strategy didn’t help the pallet industry. Even though many lumber buyers are in an inventory position that allows them to exercise some restraint, the appetite of the remanners, due to the price spread, often keeps the sawmills in the driver’s seat.

For Canadian pre-cut suppliers in the West, 2004 was an awful year. The dramatic shifts in the softwood market coupled with the falling U.S. dollar created difficult selling conditions for selling pre-cut stock for much of the year. The rise in random length economy prices this year was not impacted by the exchange rate, and cut stock found sales strength in California.

Pallet demand in the new year has been surprisingly solid in most Western markets.  Despite the first quarter typically being the slow time of the year for the Western market, activity has been brisk to robust.

Pallet prices in the West have begun to edge higher on the strength of the rising raw material prices.

 Recycled Pallet Market

Recycled pallet demand east of the Rockies remains very strong in most areas. Some parts of the Upper Midwest, especially Michigan, have seen demand soften slightly. This appears to be local economies as new pallet demand has faltered slightly in these areas, too. Most other regions still are enjoying demand that is as strong as it has been in many years. Many contacts cite the strength of the improving economy to be at the heart of the strong demand. The recycled pallet market has seen steady continued growth for a little over a year.

Demand east of the Rockies has been strong enough that some pallet recyclers report difficulty keeping up. Pallet recyclers have understandably responded by moving recycled pallet prices higher. The upward price pressure varies from region to region. Some areas simply have a bullish posture while others have responded with strong upward price pressure. However, the upward price movements are evident in almost every region. The widespread nature of the price pressure is evidence of the overall strength of the market.

In fact, demand is outpacing supply in many markets east of the Rockies. The core supply situation ranges from tight to critical in virtually all Eastern markets. Supplies of cores have continued to tighten since last year at this time.

The tightening core supply began very early last year, and there has been little relief since. There has been some good news regarding core supplies – a post-holiday influx of cores. Regardless of how modest it has been, this is good news since the shortage began with the lack of a noticeable post-holiday influx of cores. In some areas #1s are approaching critical levels.

 Contacts attribute the dwindling core supply, like the improving demand, to the improving economy. As distribution centers have been bolstering inventories to accommodate the stronger sales, their appetite for pallets grows, turning them into consumers rather than suppliers.

The percentage of #1 GMAs in the inbound core supply continues to diminish. The mix of fewer inbound cores coupled with the lower percentage of #1s in the restricted flow of inbound cores creates a double whammy on supplies of #1s.

Core supplies in the West, which at one point were in better shape than those in the East, are now in similar shape. Much like in the Eastern markets, there are problems with the supply of #1 GMAs. Core inventories in the West have dwindled under the pressure of  strong recycled pallet demand.

Reports of inbound supplies of #2s vary. Most contacts report inbound #2 supplies that are also well below expectations. So despite the growing percentage of #2 GMAs in the inbound mix, the restricted flow of cores is limiting inbound #2s in much the same fashion as #1s.

Contacts report that customer service demands seem to grow by the day. Services that used to be easy extra money for the recycler are considered part of the package in today’s recycled market.

Last-minute orders are challenging in the current market. The tight supply and strong demand are not a good mix for last-minute orders.

Higher quality recycled pallets, such as warehouse grade or premium #1s and ‘new life’ or ‘combo’ pallets, are in high demand and strain all aspects of production and logistics. Adding to the problem is that a large portion of higher quality pallets are at the heart of the last-minute demand.

(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.)