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Market Update: Famine to Feast — Recycled Pallet Market Endures Change in ’07
Recycled pallets are a fundamentally undersupplied market when demand is good. When demand slows however, core supplies improve.

By Jeff McBee
Date Posted: 11/1/2007

   What a difference a year makes. Well, it’s slightly more than a year, but the recycled pallet market nearly has done a complete 180 turnaround.

   There is an extremely fine line between very busy and lethargic in the recycled pallet industry. The fine line extends into the effects of both strong and sluggish demand.

   Slowdowns in demand in the recycled pallet market can often be a larger factor than one might expect with a mere surface view. The slowdown obviously impacts demand but often has an even larger impact on supply.

   Recycled pallets are a fundamentally undersupplied market when demand is good. When demand slows however, core supplies improve.

   The improvements come by two means. A slowdown in demand doesn’t require the quick turnaround cycles that the strong demand/undersupplied market requires. This leaves recyclers with some additional inventory on their yards.

   A larger factor, however, is the amount of pallets under-load. Distribution centers (DC) hold larger product inventories when the economy is strong. This means more pallets in the racks at DCs, and fewer pallets leaving the DC to be recycled. So, core supplies automatically tighten when business is good. Therefore when business slows, less inventory is required at DCs and they allow additional cores to enter the available whitewood stream.

   Pallet demand is clearly off from the strong demand of the first half of 2005. This is true of both new and used pallet markets.        

   The industry has quickly moved from one side of the activity ledger to the other. The recycled pallet market has exhibited trends that pinpoint the delicate balance between supply and demand in the pallet recycling industry. 

   The impact can seem even larger because of the consistently strong demand of the past several years. The strong demand of the past several years created a market where recyclers were always scrambling to keep up with strong demand and the short pallet supply that had in fact been created by the strong demand.

   Therefore, the cool down in the market had a nearly opposite effect. DCs began to reduce inventories, which sent more cores out into the market.

   The cores that were once badly needed were now flowing into the market where the demand decline meant they were no longer needed. The additional cores in a slower market become surplus ­­— unneeded and sometimes even unwanted surplus.

   The combination of stronger core supplies and weaker recycled pallet demand caused a fairly dramatic shift of the delicate balance between weaker demand and stronger pallet supplies.

   The improving core availability has caused some additional problems for some recyclers. Pallet recyclers have been accumulating pallets – often at a startling pace. The growing surplus is causing larger than desirable core
inventories. Large inventories can tie up large amounts of money which has caused cash flow problems for some. This creates some well-defined unevenness in core supplies in the pallet recycling market.

   This situation is reminiscent to the oversupply problems of the late 90’s. The biggest similarity is in the recyclers’ ability to pay – which is currently separating the men from the boys. There is a very clear divide between the haves from the have-nots of the pallet recycling world.

   Small players continue to struggle with small inventories in spite of dramatically improved local core supplies. The contrast in inventory levels is not subtle.

   The larger players in most markets are attracting more of the improved core supplies than their smaller competitors. Core supplies are predictably flowing to larger players. This is mainly due to the difference in core supply sources of small and large recyclers.

    Core acquisition costs have leveled after nearly two years of continual bullishness. On one hand pallet recyclers are pleased to find some relief in the constant upward price pressure that was the result of competition for cores while supplies were tight. At the same time however, the leveling has some companies concerned. 

   Many recyclers were still in the process of trying to get the market to digest the higher core costs. Suddenly they find themselves holding heavy inventories built with cores from the peak price. If the market concedes any ground in core prices, the value of the inventory drops. This creates a situation where even a small core price decline can cost a company big money.

   Recycled pallet demand is mainly steady but is showing signs of modest improvement in most areas. Recycled pallet demand is good but not great. 

   The market had bottomed and now improvements come at a slow but steady pace.

   The demand for #2 GMAs has been the stronger sector of the recycled market for most recyclers during 2007. Demand for #2 GMAs has outpaced #1 GMA demand in many markets. 

   Prices for # 1GMA pallets grew bearish over the summer. Prices had found some stability as of press-time. The stability was late arriving according to most recyclers.

   Although #1 GMAs prices have been weak, warehouse club grade #1 GMAs have held or even gained value. The limited supply and fairly high demand help these pallets hold their value much better.

   Prices for #2 GMA pallets remained very steady.

   (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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