What a difference a few months can make in the world of low-grade hardwood availability. Raw material availability generally has improved in most areas east of the Rockies. Supplies certainly were not overwhelming, but many companies have normal or close to normal inventories. Most companies are far enough through winter that having a buffer inventory is less of a concern.

Most areas east of the Rockies have managed at least modest improvement in availability in recent months. Weather has been a factor both in areas that have improved and those that have not.

The Northeast has the most concerns about supplies. The region managed to bolster log supplies in the fall, but cold, wet weather has taken a toll. Log supplies have withered and are down to uncomfortably low levels.

Log supplies have improved in most other areas, but the improved log availability has not always translated into gains in low-grade hardwood supplies. Industrial markets using low-grade hardwood often are blamed for the slow improvement.

Although industrial markets competing for low-grade hardwood have caused fewer problems lately, their ability to outspend the pallet industry can cause availability problems. The railtie industry remains white hot and continues to divert material from pallets.

Low-grade hardwood pricing has moved from a bullish posture to mainly steady. A few markets have registered modest price concessions. Often the lower prices are the result of lower delivery costs, not necessarily lower prices at the mill. Buyers now are often able to obtain enough material closer to home, reducing delivered costs.

Quality has been more of an issue than ever this winter. It seems that hardwood buyers have to constantly fight quality issues. Quality can silently drive hardwood costs out of the profitability range. So despite improving supplies, the decline in the quality of inbound material has hurt yield. The most common problems are undersized cants and rotten centers; both problems force waste factors higher, making the usable material more expensive.

Hardwood grade markets have been sluggish, and contacts speculate that this is a big factor in the recent quality issues. Red oak has been the hardest hit species in the grade market. The large role that red oak plays in many areas has changed the way many mills operate. The combination of strong industrial markets and lackluster grade markets has forced many mills to reevaluate all facets of their operations. This includes the quality and species of logs and even production levels.

Some of the improvement in lumber inventories has been more the result of demand dips rather than improved supply. One contact summed up the situation well: "The lumber supply is good, but not that good. We lost some customers who went out of business. If I had to ramp up to full capacity, the wood isn’t there."

Pallet demand east of the Rockies has been rather strong. Although activity is still solid to strong, the market lost some of the urgency from 2005. However, many pallet suppliers are reporting good demand levels that are returning to similar levels from late last year.

There are a few exceptions that are the result of regional trends. A few areas that have heavy concentrations of automotive OEM support products are feeling the pinch of the sluggish auto industry. Also, the Gulf Coast region continues to work to pull itself out of the aftermath of last year’s active hurricane season.

Pallet prices are mainly steady with a very few upward moves due to fuel price variation.

Western Pallet Market

The softwood grade market in the West has been anything but predictable this year. The market tried to run early and then sagged before wavering between warm and lukewarm. Grade traders were quick to blame weather in the East for most of the market’s ills. Then the weather improved, but the grade market seemed to be still stuck in neutral with neither buyers nor sellers willing to take a position.

Industrial softwood markets in the West were far closer to seasonal expectations. Sellers of industrial material were ready for another volatile price spike when the grade market started to run in late January. Although raw material availability began to tighten, those who were looking for a spring rally to match the previous two years conceded that the market was more likely to modestly climb in traditional fashion rather than spike.

Economy material was not as readily available, but lumber buyers have been able to locate all they need. The biggest availability problem was locating lumber at a desirable price level, which was clearly a challenge. Pricing seems to be more of a problem than the limited availability.

Dry economy material availability tightened more than green, and prices were indicative.

Prices for dry material pressed higher in a measured fashion since early February, giving the market a more traditional-feeling, spring price push.

Green material pricing has been far more mixed. Freight concerns, the particular mill and general quality are obvious factors that varied from region to region even within small geographic regions.

A pricing disparity between economy 2x4 and economy developed late last year and was even more pronounced in the first quarter. Whether green or dry, 2x6 has been more abundant than 2x4, and pricing for the two cuts was reflective of the strong or lacking availability. The pricing disparity remains somewhat of a mystery to even the savviest traders. One contact observed, "It’s upside down and backward."

The sag in the grade market was benefiting the pallet community. Utility and even some #3 offerings were finding the pallet industry’s price range. This helped to boost supplies in some areas – again depending on the individual mill. Some lumber buyers had to hold off suppliers while others were struggling to find material to keep up with demand. Most contacts found raw material availability to be manageably tight.

Short length material has become a very large part of the industrial softwood market – too much for some buyers, who find it takes extra work to avoid bad tallies. Buyers report that even random tallies are often tilted to short material.

Prices in the pre-cut market are mainly steady. Cut stock prices are far more widespread than normal. Canadian pre-cut suppliers in the West are fighting a myriad of profitability issues in the sporadic softwood market.

One contact, commenting on some of the cut-throat prices, observed, "We can’t sell a stick in California. They’re crazy."

Pallet demand is mixed in the West. Activity levels in the Northwest are strong. California’s demand levels are ahead of last year with strong demand in southern California and modest demand in northern California that is above last year’s solid levels.

Pallet prices in the West remain steady at levels established earlier. There are some reports of overly competitive pricing.

Recycled Pallet Market

The recycled pallet market usually depends on the early part of the year to bolster inventories prior to early spring, when seasonal demand kicks in. The combination of slower demand and the usual influx of pallets that are typically the result of the holiday season help to bolster inventories that were often depleted by the end-of-the-year push.

There are two problems facing the recycling community this year. The first is that demand has tapered off only slightly. The second is that the usual post-holiday influx of pallets has not occurred, and after the market’s behavior last year, it seems a safe bet that the recycling community will have to manage without any post-holiday influx again this year.

The taper in demand was only slight, and many recyclers report that the market is picking up already. Even the companies that report slower activity are ahead of last year’s pace, which was a good year.

The lull in recycled pallet demand has not been universal, either. Many companies already report strengthening demand, which is earlier than normal.

The companies that are down from last year’s pace view the lag as temporary and are not concerned. In fact, some view the demand slowdown as a good thing. Any break from the hectic activity has been somewhat of a welcomed chance to catch up. After all, the industry has been dealing with demand that has been very close to being too strong to handle. In this case strong demand is simply too much of a good thing.

The constant press of trying to keep up with demand has been complicated by tight core supplies. Many pallet users have been forced to buy new pallets because recycled demand has been stronger than core supplies will support.

The ongoing core shortage, rapidly approaching its third birthday, has forced pallet recyclers to change the way they approach the market. The constant battle of managing the core shortage and strong demand have many recyclers altering the way they do business in order to keep up.

The core supply shortage is as intense as it has ever been despite lower demand levels, which have helped some. Hope for any post-holiday influx of cores is rapidly fading. So far, there has been no increase in core supplies, not even on a smaller scale.

The shortage seems to grow worse each week. Even when many recyclers feel that core supplies cannot get any worse, the market seems to find a way. Core supplies are extremely tight in almost every region.

The number of cores is not the only supply-side problem facing pallet recyclers. The declining quality of available whitewood cores has been an issue for a number of years. So, the smaller inbound volume of pallets translates into even fewer usable pallets, which in turn just exacerbates the problem.

Even with the slight downward tilt in the market, though, recycled pallet demand remains above seasonal expectations. Demand is evenly spread across many market sectors. This is giving pause to recyclers who already are looking to spring seasonal activity with more than a little trepidation – wondering how they will find enough cores to supply some of their markets’ strongest demand.

Beyond operational concerns, the combination of strong demand and anemic supply is continuing to drive costs higher. This trend has turned into a cycle that may have no end prior to a better supply-demand balance. Both core prices and ready pallet prices are moving higher in many areas.

Supply and demand trends require a faster turn of the limited inventories. Many pallet recyclers report that they continue to work with hand-to-mouth turnaround cycles in order to accommodate demand.

Pallet recyclers have tried to reduce their customer base to eliminate some of the problems – increasing pallet prices to encourage customers to leave. The strategy has been relatively ineffective because customers have nowhere to go; the customers begrudgingly pay the higher price.

Then the recycler is at the start of the cycle again. Selling at a higher price is always nice, but that doesn’t eliminate the problem. In fact, it just intensifies competition for the limited number of cores. This in turn keeps upward pressure on core prices as pallet recyclers look for more core sources.

The percentage of #1 GMAs has been in decline due to the declining quality of the overall pool. The results are fewer and fewer #1 GMAs. The shrinking percentage of #1s in the declining whitewood pool magnifies the problems of the hand-to-mouth nature of the current market.

Inbound supplies of #2 GMAs are tight in nearly every region despite being a higher percentage of the overall market. Areas where #2s are the higher demand portion of the market are having difficulty keeping pace.

Customer service demands remain very high. Services that used to bring extra money are now expected as part of the package. Customers expect a high level of service even before pricing is discussed.

Last-minute orders remain problematic, straining production and delivery schedules.

(Editor’s Note: Jeff McBee is an analyst who researches and writes about the pallet industry and its raw material markets for