The record hurricane season is over, but the impact is still being felt. Most of the business lost along the Gulf Coast is now or soon to be back online. The slowdown in pallet activity was felt as far north as Ohio.

The impact is also still being felt in fuel prices. Earlier price spikes for gasoline have retreated to pre-Katrina levels, but there are two problems. Fuel prices have been problematic and inflationary the entire year. The pre-Katrina gasoline prices already were up 25% due to higher oil prices. The bigger problem for the pallet industry is that diesel pricing did not retreat the way gasoline pricing did.

Low-grade hardwood supplies remain tight in most areas east of the Rockies. Many areas have registered modest improvements, but surpluses are not sufficient to eliminate concern as the industry heads into the most difficult stretch of winter. In some areas contacts are voicing concern about inventory levels. Although supplies have improved somewhat, many pallet manufacturers headed into winter with minimal buffer inventories.

Low-grade hardwood prices have been mainly stable in recent months with some upward pressure being caused by higher fuel and freight costs.

Quality has become an essential issue for many hardwood buyers. Quality can quietly have a negative effect on hardwood costs. Contacts report that along with improvements in supply has come a sudden decline in the quality of inbound material. The most common issues are undersized cants and more rotten centers. Both problems drive waste factors higher, which in turn raises the actual price of the usable material.

Sluggish hardwood grade markets are a large part of this equation. Red oak markets have taken a larger hit than any other sector in the grade market. This has changed the way many mills operate. Mills are forced to re-evaluate every aspect of their operations. This impacts the quality and species of logs they will saw and how much a particular mill will produce. Many mills rely heavily on red oak and because of financial concerns are running limited production schedules. Finances are also a consideration that has mills focusing on lower grade logs to accommodate strong industrial markets.

Industrial hardwood markets have been a bright spot for sawmills and a challenging competition for the pallet industry throughout the current shortage. Railties are the strongest segment and show no signs of slowing. Other markets vying for low-grade hardwood also are benefiting from strong demand and are able to outspend the pallet industry with no trouble.

Pallet demand east of the Rockies has been fairly stout all year. There have been a few modest dips in demand at times, but overall pallet demand has been quite strong. Demand for the end of the year was mixed, depending on the region. Some areas were dealing with the frenzied levels from earlier in the year while others were experiencing moderate demand.

Pallet prices continue to trend upward mainly due to fuel price moves.

Western Pallet Market

Industrial softwood markets in the West behaved closer to seasonal expectations in the closing months of the year.

The softwood market has been volatile all year, so the market’s behaving in a more predictable fashion was welcomed by industrial lumber buyers.

The first three quarters of the year markets were very reactionary, spiking and falling with the sporadic moves of the grade market. The pallet industry’s preparedness paid dividends in avoiding a repeat of 2004. Unlike 2004, the pallet industry had healthy inventories and was able to refrain from buying during the spikes — therefore contributing to steadiness in the market rather than participating in a repeat of 2004’s chaotic conditions. When the industrial market faded, pallet lumber buyers were squarely in the driver’s seat.

Industrial softwood lumber supplies were solid as 2005 neared its close. Availability was not as stout as earlier in the fall, but modest surpluses were evident. Economy material was readily available, but lumber buyers found locating lumber at attractive prices a challenge.

Canadian pre-cut suppliers in the West continued to wrestle with profitability issues in the sporadic softwood market.

Most pallet lumber buyers report hefty inventories. Many are no longer trying to reduce inventory. Most lumber buyers see no downside risk in buying at current prices.

Pallet demand has held solid in the West. It usually tapers off shortly after the Thanksgiving holiday, but demand continued to run solid toward the end of the year.

Pallet prices were mainly steady at levels established earlier.

Recycled Pallet Market

The list of superlatives used to describe the strength of recycled pallet demand is exhausted, yet demand in the recycled industry continues to strengthen.

The strong demand is certainly good news but is often viewed as a mixed blessing. The down side of such strong demand is the industry’s inability to completely satisfy customers’ appetites. The biggest problem is that in many areas demand is stronger than core supplies will support. Most pallet recyclers are barely able to keep up with demand levels while dealing with the current core shortage. As demand grows stronger, keeping pace is nearly intolerable.

The core supply shortage has become progressively more intense for nearly two years. Core supplies are extraordinarily tight in all regions.

The severity of the core shortage is creating its own set of problems beyond simple supply concerns. Contacts report that the problem of dealing with the small volume of pallets is compounded by the declining quality of available cores. The overall core supply state of affairs is maddening for many recyclers.

Recycled pallet demand remains astoundingly strong, even beyond seasonal expectations. The strong demand is spread across nearly all sectors of the market.

Many recyclers report record months, but dealing with the core shortage and strong demand is a daunting task. Even companies reporting the slowest activity have solid to strong demand.

The combination of strong demand and tight core supplies is pressing both costs and prices higher. Pricing on both cores and ready pallets continue to press upward throughout the industry.

The combination of low core supplies and white hot demand presents a whole new set of challenges for pallet recyclers. Recyclers are forced to turn pallets faster than ever. These market conditions demand a much faster circulation of the limited number of available pallets. Many pallet recyclers are performing hand-to-mouth turnaround cycles to keep up with demand.

Some recyclers have tried to trim their customer base by moving prices higher. The strategy of forcing customers to leave has been unsuccessful. The fault in this strategy is that customers have nowhere else to go. The customers often shop around, only to find almost everyone is in the same situation.

The result of keeping customers at the higher prices is more demand. This forces more competition for the limited number of cores. Pallet recyclers are constantly looking for new sources of cores. This intensifies the competition for cores and keeps upward pressure on core prices.

The declining quality of the overall pallet pool only contributes to the growing problem. The percentage of #1 GMAs in the available pool has been in steady decline for years. The continuing decline means fewer and fewer #1 GMAs are available. The resulting number of #1s in the shrinking white wood pool intensifies the shortage and the hand-to-mouth nature of the current market.

Inbound supplies of #2 GMAs have also been very tight. Even the strongest inbound #2 supplies remain well below seasonal expectations. Markets where #2s are always in high demand are facing nearly nonexistent #2 supplies.

Customer service demands often overload recyclers dealing with the hectic fast turnaround of available pallets in the core challenged market. Additional services that were once moneymakers for recylers now are expected in today’s market. Customers view service as a given before pricing is discussed.

Last-minute orders continue to tax production and delivery schedules and are particularly troubling in the current market. Last-minute orders are a growing problem that has intensified; they used to be an occasional problem but are now a very common challenge.

Warehouse, club and premium quality recycled pallets continue to be one of the market’s highest demand items. These premium pallets also command premium prices. Another hot item in some regions has been heat-treated #2 pallets.