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Market Update: Decisions, Decisions
Sometimes the only business decision is not a good business decision, but itís the only decision.

By Jeff McBee
Date Posted: 5/1/2009

††††††††††† I can remember it like it was yesterday. It happened so fast. Well, it seemed like it happened so fast, but in reality it ended so fast.

††††††††††† Iím talking about a pallet company that went out of business Ė one that had been a model citizen since the early days of the pallet industry.

††††††††††† The company was thriving. Then they entered into some new ventures. It all seemed like it was good, solid business Ė well-planned with a good strategy. It couldnít miss.

††††††††††† Several months later it seemed the company was doing fine. By some accounts, the new ventures were even exceeding expectations.

††††††††††† Then it happened.

††††††††††† Suddenly, people were talking. The owner was acting irrationally. Machinery orders were cancelled; then they were back on, only to be cancelled again. The erratic behavior wasnít limited to buying machinery, either. Not long after the talk from machinery vendors, lumber suppliers began to whisper.

††††††††††† This was a good company; its long and storied history was like a guarantee on an invoice, and the owner was good for it, too.

††††††††††† Then, the companyís pallet prices became even more inconsistent and
unpredictable than any of the ownerís behavior.

††††††††††† Within six weeks, the company was gone. There was a lot of speculation and cross-talk, but the truth about what happened may never be known.

††††††††††† One thing is certain: after the company went into a tailspin, the owner was never able to pull it out.

††††††††††† An industry leader whose company was considered a model for efficiency and quality was gone.

††††††††††† I learned some of the details from the owner later. One thing that stood out from those conversations was that his erratic decisions were desperate moves to save the company. The business decisions that actually sealed his companyís fate likely had been made earlier.

††††††††††† What was the moral in all of this? Sometimes the only business decision is not a good business decision, but itís the only decision.

††††††††††† That is where the sawmill industry is right now.

††††††††††† The business climate has become more than difficult in the hardwood sawmill industry. Mills have confronted grade markets that have been beyond poor for over a year. Industrial applications became the only game in town, which put a premium on a millís ability to function in primarily low-grade hardwood markets.

††††††††††† The big challenge for mills is trying to remain profitable while sawing only low-grade hardwood. There is extra work involved in focusing on low-grade logs, but they generate smaller dollar volumes Ė a daunting challenge.

††††††††††† Industrial markets were solid if not strong throughout 2008 and most of this year. That began to change eight weeks ago.

††††††††††† Mills have focused on industrial markets for a little over a year. The trouble began when mills, even though running limited production, still out-produced demand. Activity became spread too thin, and pricing became indicative of the oversupply.

††††††††††† The problem arises when the entire hardwood sawmill industry begins to lean heavily on industrial markets due to poor conditions in the grade market.

††††††††††† Industrial hardwood products for the oil industry were one of the strongest product sectors of 2008. Board road and crane mats commanded a premium because they were in high demand. It was good business. However, the market changed dramatically when domestic oil prices fell.

††††††††††† Railties became a classic case of too many mills focusing on one market sector. The oversupply first surfaced when tie buyers began to pull back on switch tie purchases. This was the first sign of a turn in the tie market. Large tie treaters began to change buying practices; they chose to do business only with long time suppliers. Demand in the tie market remains solid to strong, but when a lot of hardwood sawmills focus on one product, it is easy for them to outrun the market.

††††††††††† Inventories began growing at pallet manufacturing companies. The sudden growth in inventory was not due to stronger raw material availability; it was due to sawmill production that outpaced low-grade hardwood demand in most areas.

††††††††††† The combination of trends was the worst of news for the hardwood sawmill industry. Demand for board road and crane mats vanished. Tie demand was only good for long-term vendors. Then, low-grade hardwood supplies were too strong for pallet demand.

††††††††††† The growth in low-grade hardwood inventories created a very unhealthy business climate for sawmills. The focus on low-grade markets began to exert downward pressure on raw material pricing.

††††††††††† Some low-grade prices had already fallen as mills looked to generate cash to stay afloat. To say that this is an unhealthy trend for sawmills would be a gross understatement.

††††††††††† Some regions have maintained stable prices as lumber buyers are more concerned about the long-term viability of their supply chain.

††††††††††† Other regions have seen mills try to stir demand by reducing prices; cant prices have tumbled by over $30 per thousand.

††††††††††† These are obviously desperation moves that donít make much sense, but, as I noted above, sometimes the only business decision is not a good business decision Ė itís the only decision.

††††††††††† Pallet lumber buyers have to take care of their businessís concerns first, and they are not responsible for keeping their vendors in business. Sometimes, though, finding a way to do both might be worth your while in 2010.

††††††††††† (Editorís 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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