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Market Update: 2003 Provides An Interesting History Lesson
Will the grade market take the same path in January four years later? It seems less likely this time around, but then again: those who cannot learn from history are doomed to repeat it.

By Jeff McBee
Date Posted: 10/1/2007

   Philosopher and poet George Santayana is credited with the commonly used phrase, “Those who cannot learn from history are doomed to repeat it.”

   During a conversation with one of our Western market contacts back in the spring, when the grade market wasn’t behaving in expected fashion, I mentioned how it reminded me of 2003.

   This year’s trends have displayed many similarities to 2003:

   • The grade market failed to really move in either year.

   • Industrial material availability was solid to strong in the spring due to strong mill output based on expectations for a normal grade market.

   • Pallet manufacturers had strong inventories built during the winter to serve as a buffer against the higher prices that spring usually brings.

   • Price levels quickly flattened as surpluses on the market and on pallet manufacturers’ yards served as leverage against pricing.

   • Canadian cut stock suppliers found it nearly impossible to compete against depressed random length economy prices.

   • Mills employed temporary shutdowns and production curtailments as an attempt to deal with the poor grade market.

   • The limited production was felt more in the industrial market.

   • The limited supply of industrial material seemed to always be slightly stronger than consumption as most pallet lumber buyers shopped for deals from an off-market position.

   • There was a standoff between buyer and seller in the industrial softwood market.

   • Pallet demand, although solid, never displayed any urgency.

   The similarities continued to unfold as this year has progressed. Recently in a phone conversation with another one of our Western market contacts, I mentioned the idea of the similarities and my fascination with the two years, four years removed from one another.

   As we talked, I mentioned that even the prices of economy material had tracked similarly. This contact keeps numbers charted for raw material costing purposes. He opened his graphed numbers and was surprised. He sent along his chart via e-mail, and I was even more astonished.

   We decided to provide the same information from the Pallet Profile Weekly’s published numbers. This will give you a snapshot view of how 2003 compares to the 2007 market.

   As you can see in the accompanying chart, pricing for the two years tracks very similarly.

   What is equally astonishing is what the market did for the first half of 2004. All the trends that held the market in check throughout 2003 set up the huge run in 2004.

   During the second half of 2003, pallet manufacturers leaned on inventories to keep prices in check. During that time, inventory levels drifted lower. Pallet lumber buyers were waiting for January to replenish inventory, anticipating the traditional lowest prices of the year.

   A funny thing happened to expectations however. Spring came early – not the weather, but spring-like behavior in the grade market. To everyone’s surprise, the Western grade softwood market grew white hot overnight, and prices spiked.

   The dramatic shift in the price landscape caught almost everyone dealing with industrial softwood off guard, leaving everyone — lumber buyers, wholesalers, sawmills — amazed by the steep increases. Normal winter surpluses never materialized.

   Supplies of industrial softwood were nearly nonexistent. The pallet industry was universally blind-sided by the mysterious shortage and shockingly high prices. The sudden shortage that appeared while lumber buyers waited for traditional winter surpluses left the most savvy industry veterans scratching their heads.

   Availability of industrial softwood moved from levels below seasonal expectations to a shortage – seemingly in the blink of an eye.

   The normal surpluses didn’t materialize, and suddenly lumber buyers looking to build inventory found themselves facing a sellers market. Everyone needed to buy. Prices were skyrocketing, and the entire market was behind the proverbial eight ball.

   Will the grade market take the same path in January four years later? It seems less likely this time around, but then again: those who cannot learn from history are doomed to repeat it.

   (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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