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Market Update: Texas Gets the Short End of the Stick in Gulf Region Supply Crunch
Weather, rains flood Gulf Region adding to the already tight supply in the hardwood grade market.

By Jeff McBee
Date Posted: 8/1/2007

   The recent rains in Texas and along the Gulf Coast region have been well documented. National news reports focused more on Texas because of the amount of rain and flooding. That doesn’t mean that Louisiana, Mississippi and Alabama stayed bone-dry. They just didn’t get 19 inches of rain out of one storm like parts of Texas did.

   In addition, forecasters were predicting more heavy rain for the region in late July.

   The recent heavy rain in the Gulf States region was forcing some of the first harsh shifts in a few years in trends of low-grade hardwood markets east of the Rockies.

   Weather always has the potential to be a negative factor in availability of pallet material, and it is certainly the case this time. When bad weather comes on the heels of a market that already has tight supplies due to market forces, it is a double-whammy.

   Hardwood grade markets have been lethargic the past year, which has affected production at many sawmills. Grade sawmills have reduced production as much as possible. Instead of adding shifts in the summer, which the season usually dictates, curtailed production has reduced supplies of low-grade hardwood.

   The one bright spot for hardwood sawmills has been solid demand from the pallet industry and other industries that use low-grade hardwood. Three sectors that compete with the pallet industry are very active in hardwood markets in the Gulf States region — railties, steel blocking and board road/crane mats.

   Railties and switch ties have been solidly strong for several years, and industry projections indicate continued modest growth. Board road/crane mats for domestic oil exploration is easily the hottest industrial hardwood item in the current market. They have been bringing big money. The prices have been sizeable enough to draw interest from mills way outside their normal market areas.

   The recent rains along the Gulf Coast intensified competition for board road/crane mat, and by late July they were bringing as much as $500 at the mill. One Gulf States sawmill contact made the observation, “We are getting an extra $150 at the mill to rip a cant. It’s a no-brainer.”

   When prices in these competing industrial hardwood markets get so high, it goes without saying that low-grade hardwood for pallet material becomes harder to find and more expensive. As one contact observed, “Sawmills are not trying to charge $400-mill for 6x8s. They’re just not cutting any.”

   These conditions have made it particularly challenging for pallet manufacturers in Texas, where a large percentage of manufacturing capacity is fueled by scragg mills.

   Recent weather has created a logging dilemma in east Texas. Heavy rain has driven loggers out of bottomlands for at least two months by all accounts. This could keep bottomland logging from being an option until mid-September – a time when the wet season begins and usually drives loggers out of the lowlands until spring.

   The limited logging and the resulting tight log supply are having a big impact on all forest products in the region. Pulp and paper companies have become aggressive in efforts to get raw material, with pulp log prices up about 15%.

   Despite higher prices for logs, mills can only draw from the available supply, and the lack of logs has forced two paper mills in the region to lose production time. The cost of restarting a paper plant is exorbitant, and the fact that supply-related shutdowns have occurred speaks volumes about the tight log

   Some large scragg operations were unable to compete for pulp logs in the region in late July. As long as board road/crane mat is running as high as $500 per thousand at the mill, it will be difficult for the pallet industry to get its share of raw material.

   All these factors have contributed to higher prices for raw material throughout the Gulf States region. Log prices are higher, and prices for cants and boards have moved higher.

   Higher raw material prices began to press pallet prices higher. Pallet suppliers have been reluctant to increase prices, but higher costs for raw material are forcing the moves.

   Pallet suppliers announced price increases up to 6%. The price increases were not in place long enough to gauge customer reaction.

   (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.)

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