The softwood market in the West has been mired in a tailspin for months. Not even the most grizzled lumber market veterans have answers.

            Prices in the grade market stabilized briefly in late December and early January as many mills took extended downtime. Then, as mills began to bring their production back online, grade softwood prices fell down into the lap of economy lumber prices.

            This trend has hit softwood sawmills in the West especially hard. The softwood market in the West already was dealing with weak demand across all grades. The latest twist resulted in extremely discounted upper grade offerings.

            Mills normally produce far more #2 and #3 material than economy stock, so the higher grade material accumulates much faster. This seemed to foster an attitude at the mills that moving the material to any willing buyer was more important than price; they targeted any and all willing buyers, including the pallet industry, with all grades. Mills have far more #2 and #3 material to clear from their yards than the modest volume of economy that accumulates.

            Prices on offerings of #2 material dropped below October’s prices for economy material. This kind of pricing is indicative of the backlog of material in a market where prices cannot stir interest because inventories are too heavy. Buyers are not interested at any price.

            The main problem for mills is that pallet lumber buyers are in the same situation; their inventories are growing due to slower sales. Lumber buyers recognize the value in the offerings but have no reason to take on extra inventory.

            Several large Canadian mills announced more shutdowns and curtailments early in February. Many had just returned from prolonged holiday shutdowns. However, they found the market financially unbearable and once again were closing mills or rotating closures to bring production closer to demand in the grade market.

            This will help prop up the #2 & better market, but the news didn’t resonate with the pallet industry. Even the grade market’s reaction to the announcements was cautious. Everyone on both sides of any transaction knows that it will take quite a while to work through inventories at most mills.

            The announcements gave the softwood grade market in the West a modest upturn. The shutdowns do not appear any more austere than those from December.

            Prices in the grade market firmed up slightly in reaction to the announcements. Still, pricing in the grade market remained far closer to economy lumber prices than traditional spreads.

            Interest in economy was minimized by the volume of on-grade material at price points very close to economy prices.

            Economy material became a very tough sell because of the volume of grade material finding its way into the pallet industry. The higher grade material is generally a far better value for pallet manufacturers because of the better yield.

            Economy softwood prices held steady for quite a while as mills focused on moving higher grade offerings to industrial softwood users. More recently the market for economy material finally began to react, and the downward moves were harsh.

            The large concessions seemed to focus as much on reestablishing a more traditional price spread between economy and #2 and #3 as they did moving the stalled economy material.

            Even after considerable price concessions, economy material remained a very tough sell due to the tremendous value of the higher grade material in the market.

            Possibly the biggest surprise to come out of the latest round of substantial concessions was an upturn in activity in cut stock sales for Canadian suppliers.

            Canadian cut stock suppliers wrestled with finding profitability during 2008 because of the far-reaching shift in the currency exchange rate between the U.S. and Canada. The U.S. dollar lost value against the Canadian dollar, leaving the two close to level for several months.  The exchange rate has been adjusting back to a level that works better for Canadian suppliers.

            Delivered cut stock prices dropped considerably in the U.S. The concessions were not subtle.

              Cut stock suppliers were still able to find orders at workable levels. Several factors worked in their favor. The first was the favorable shift in the exchange rate. Second, random length prices dropped dramatically in Canada’s local markets. Third, trucks became very affordable as truckers looked to stir activity. The three factors combined to allow cut stock providers to absorb hefty concessions and remain profitable.

            The only remaining problem for the cut stock providers was finding willing buyers for softwood stock in the lethargic market – which in itself was still no small task. Most cut stock suppliers leaned heavily on demand from the 48x40 agribusiness sector, which appears to be less recession-proof than in many years. Still, the activity was enough to keep cut stock order files healthy.

            (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.)