I came to work for Industrial Reporting in May of 1992. Like a good oak cant, I was rough and green. No one knew at that point that the industry was on the cusp of unprecedented change in supplies and price increases that would change raw material prices – for better or for worse – permanently.

            Even the most savvy industry veterans were constantly surprised by the moving targets presented by the two year low-grade hardwood crunch that finally settled late in the summer of 1994. Prices didn’t retreat from that run-up until early February of 1995.

            There have been some acute shortages since then, but none of them rivaled 1992/1993… until now. There were two phrases that were common in 1992/1993 that have resurfaced in this current shortage. The first was, “I have been in this business for (insert number of years here), and I’ve never seen any like this.”

            That phrase has now been altered. Now people are saying, “I have been in this business for (insert number of years here), and I’ve never seen any like this. Not even 1992.”

            The other phrase commonly used remains unchanged, “It’s going to be/get interesting.”

            I began recently replying to that phrase with my own line of, “Interesting is another word for scary.”

            The line usually is good for a chuckle, but only because of the truth involved. The current low-grade hardwood shortage could remain “interesting” for a while or conditions could lead to a less “interesting” summer.

            The biggest difference between the low-grade hardwood shortage of 1992/1993 and today is solutions on the horizon. In 1992/1993, the answer was for weather to cooperate and sawmill production to catch up with demand. The answers are not so clear-cut this time around.

            The current low-grade hardwood shortage brings back memories of the 1992/1993 hardwood market and many in the pallet industry are quick to point out the similarities. The widespread scope and acute shortage are similar, but for every similarity there is a striking difference. The shortage of the early 90’s was demand driven, while the current shortage is caused by market-driven supply shortages.

             Low-grade hardwood supplies began to unravel in most areas east of the Rockies when a snag caused by weather quickly escalated into a full-blown raw-material crisis in many areas.

            Much like 1992, the current shortage was felt first by the pallet industry. Soon after the pallet industry had begun taking note of the shortfall, other industrial hardwood users become aware of the brewing shortage and began to magnify the problem as industries with deeper pockets began to shore-up any potential material shortfalls.

            About the time it seemed like things couldn’t get any uglier in the low-grade hardwood market, the paper industry joined the fray. Paper companies were suddenly placing bonuses on round-wood that were steep enough to even attract some grade logs.

            Buyers from the paper industry were cruising sawmills’ yards to buy logs – and in some cases cants – to fill the shortfall. One contact observed, “A sawmill owner who had just sold half of his log deck pointed to his cants and asked the paper buyer ‘How much?’ It was a done deal before the question. The paper company was close to having to shut down a digester. The buyer said that the cants would look good going into their 76” chipper.”

            The 8.8 earthquake in Chile disrupted three of the country’s largest pulp mills. At first blush, this might seem minimal, but Chile produces approximately 9% of the world’s pulp. It could be months before the paper industry completely absorbs the total impact. 

            Low-grade hardwood supplies that were already hand-to-mouth were suddenly causing very real concerns within the pallet industry that running out of raw material was a very distinct possibility. 

            Prices on low-grade hardwood predictably spiked registering some historically large price increases. Pallet suppliers in many areas were forced to view price as a secondary concern to availability.

            Cant prices jumped by as much as $65 per thousand in two weeks in some regions. Not only did low-grade hardwood notch some of its largest price increases, but pallet cant prices found historical highs with some cant prices hitting $460 per thousand bf delivered in the Gulf Region.

            The extremely tight supplies contributed to the skyrocketing prices in two ways. The obvious factor came as upward price pressure on existing mill prices. The second and equally intense factor came from of buyers looking farther away from their normal buying region; delivered prices climb with the additional freight. Plotting the pricing on a map was like watching a wave of price spikes starting at the Gulf and moving rapidly northward.    

            Will the current shortage last as long as the 1992/1993 shortage? Or is this shortage destined to be short-lived and will correct with better weather? It is hard to gauge whether recovery will come that easily. The problem in trying to determine how quickly supplies will recover is the uncertainty that became the dominoes that led to the current crunch. The current shortage started due to limited demand and poor activity in the forest products industry and the overall poor economy.

            Weak housing resulted in deficient grade sales. Lackluster grade markets resulted in weak grade prices and sales. The poor grade market forced prices downward, which in turn put downward pressure on log prices, limiting the volume of logs making it to market.

            Sawmill production dropped to extremely low levels as sawmills viewed the market from a survival standpoint. Some mills were mothballed. Some opted for suspension of operations, while others were unable to survive and closed permanently.

            Hardwood mills that continued to run opted to do so by running limited schedules. Many mills were running three to four days per week. Inbound log supplies and log inventories were at similar three to four day levels. Everything ran well for a while in that delicate balance.

            Despite lackluster business in many forest products markets, enough time passed that the surpluses that were in the pipeline were digested. Supplies had begun to tighten when weather became a larger-than-anticipated factor. The log decks that were limited by design were quickly gone. The inbound supply of logs went from limited to non-existent.

            So much of the problem started with the supply side that getting a read on the potential recovery is difficult at best. Has demand improved enough to encourage mills to run more? Will weather cooperate enough to facilitate that? Will the housing market find even some limited traction? There are certainly more questions than answers.

            (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.)