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Market Update: Gentlemen Start Your Engines: Can Racing Strategy Help the Pallet Industry?
The forest products marketsí plunge in activity and subsequently pricing of many, if not most, items can be tied to the housing marketís temporary demise.

By Jeff McBee
Date Posted: 9/1/2009

††††††††††† In NASCAR, when a wreck stops the action, there is a caution flag. The drivers continue at a reduced pace behind the pace car for a minimum of three laps. The logic behind the minimum of three laps is to allow all drivers to pit and have their cars ready for the restart when the green flag comes out.

††††††††††† Youíre probably wondering what the correlation of NASCAR to the forest products industry would be (other than the fairly high percentage of fans in the industry).

††††††††††† The forest products industry has been running under conditions that could easily be compared to a yellow flag in NASCAR. I will resist the urge to make jokes about the economy and a wreck, but the vastly out of the ordinary market fundamentals have slowed the forest products industry more than the overall economy has slowed. Much of the more pronounced impact can be attributed to the housing market disappearing nearly overnight. ††††††

††††††††††† The forest products marketsí plunge in activity and subsequently pricing of many, if not most, items can be tied to the housing marketís temporary demise. The impact is being fully felt in both softwood and hardwood markets throughout North America.

††††††††††† The similarities of the effects and subsequent strategies in both hardwood and softwood markets is actually astonishing. Activity in the grade markets faltered and pricing for upper grade material began to weaken. Industrial wood became the mainstay based on activity far more than price. Mills faced tough profitability issues where log costs and lumber prices crept too close together.

††††††††††† Many mills began to curtail production or suspend operation altogether. The mills that continued to run were often operating to a great extent to take care of financial obligations and retain key employees.

††††††††††† Since a large portion of activity was focused on industrial applications, it didnít take long for the limited production to outpace the solid but not spectacular demand from industrial sectors. Soon, prices for industrial offerings began to surrender price concessions. The cycle was complete. The one sector that provided activity was oversupplied.

††††††††††† Mills that had focused on industrial markets found them to be a less attractive option. More curtailments and closures followed.

††††††††††† Sawmill production reached the lowest levels in years and has now hovered around those extremely low levels for most of the year. †††††††

††††††††††† There have been some modestly encouraging signs regarding the economy. Gross domestic product (GDP) decline has slowed. Some economists are pointing to actual growth in GDP as soon as October. The projected growth is less than a half percent, but it would be actual growth.

††††††††††† Housing trends have also provided some modestly encouraging news. The housing market is still far from where it needs to be for the sake of the economy in general and the forest products industry in particular. A full recovery for the forest products industry has to involve a healthy housing market.

††††††††††† It is likely that the pallet industry will begin to see some activity before the housing market stages its revival. In fact, that activity is almost certain to be the beginning of economic growth that will restart the housing market.

††††††††††† Thereís no telling how strong pallet demand can be in the absence of auto-related and housing related demand but a good clue might be from recent history. Housing and automotive markets were dull in early 2008, but pallet demand was solid, very solid. If the industry returns to those levels, it is the return of the green flag and racing is on.

††††††††††† When the yellow flag caution period is over, drivers are supposed to be ready to go. So when the green flag drops, where will we be as an industry?

††††††††††† Will the pallet industry be ready to go? The question in this analogy quickly turns to the pit-crew. What will the sawmills be able to bring to the table if pallet demand begins to turn?

††††††††††† There are already areas east of the Rockies where hardwood cant prices dropped substantially only to see area mills shut down. Now some of those areas are dealing with a shortfall of material. The wood going out of the door is more than their inbound material. The impact on the market is as one would expect; prices have begun to edge upward.

††††††††††† The temptation for many pallet operations where raw material supplies have been strong is to liquidate inventory in favor of ready cash. That is understandable. It also has some risk involved.

††††††††††† Sawmills that catered to the industrial markets earlier in the year did so to keep running. The mills that have suspended operations are not likely to return for low grade material alone, even if industrial material takes on a bullish posture.

††††††††††† It would be nice to have a crystal ball to know how things will play out when the market begins to turn, but none of us are that fortunate. What can help considerably is to ponder how the market in your area will react when the time comes. As the old saying goes, an ounce of prevention is worth a pound of cure.

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