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Letter from Ed - Trends Establishing a New Pattern
Dr. Ed Brindley reviews key trends including lumber challenges, rising nail costs, labor woes, market volatility and globalization.

By Dr. Ed Brindley
Date Posted: 6/1/2010

            For years, the forest products industry has been able to mature with minimal impact by the drastic changes in technology and society taking place around us. That reality is no more. The old patterns of doing business appear to be gone – maybe forever. Now everything is faster, leaner, complex and more diverse.

            There is no doubt that change has become an expected commodity today. But this goes beyond the current political situation in Washington D.C. or even the global economic woes. Change appears to be the one constant that we can expect. That means that old patterns and rules of thumb may not work.

            One might ask, what can I do about avoiding changes that I do not like? In some cases, maybe nothing. But often we can prepare. Let’s look at some key factors for the industry and ways that change may be forever changing the business landscape.

            First, let’s take a look at labor. While pallet companies have typically run pretty lean, many had allowed their payrolls to expand somewhat beyond what was required to manufacture their pallets. During the last two years, many pallet companies have cut staff or hours. They have reduced production to match demand changes and worked to stabilize profits as well as possible. Everybody worked a little harder and may have done things they once did not have to do. Employees have to take a more team-focused instead of task-oriented approach. This may not change even as the economy rebounds.

            Most pallet companies have resisted adding people unless their product demand requires it. Instead they have tried to become more efficient with current staff by eliminating unnecessary steps. I expect this trend to remain in both our industry and in society as a whole. But there is a huge downside for companies that focus too much on the current bottom line.

            Many pallet companies report an improvement in demand over the past year, on the heels of a major decline in the six months after the last Presidential election. As Jeff McBee has so often reminded me, we are experiencing an almost jobless recovery. Companies will run leaner and meaner, but most are going to be slow to add more people to their labor forces.

            Companies must be careful not to be lulled into complacency as business levels find new norms. If your company does not have a strategy to increase revenue, you are not setting yourself up for growth. Sure profits may be up in the short term as you cut costs, but that does little to improve the prospects of your business going forward. Now is the time to plan and execute strategies to grow your revenue and customer base.

            Second, look at our biggest expense item – lumber. We have experienced some crazy swings in the lumber market, both softwoods and hardwoods. Sawmills are reluctant to add to their labor forces, thereby producing as much as the log decks and labor forces will permit and the market will support. They have been stung very hard by the recession. Survival has become the watchword. Do not expect their business practices to revert back to the old ways any time soon. They will try to satisfy the market but still run lean and mean.

            As we have during other volatile periods, pallet companies will adjust by changing from hardwoods to softwood, by running scragg mills if necessary, by using more recycled pallets and adjusting to a mixture of new and used wood. Look for pallet companies to stay as flexible as possible to meet customers’ demands. Your ability to forecast in this market is critical for success. That is why our market reports and service are critical for both pallet companies and lumber suppliers. Paid subscribers to our exclusive market reports are kept informed about the latest industry news and market developments. Additionally, subscribers can always call our full-time market analyst to discuss the latest developments. Call Jeff McBee at 804-550-0323 to chat about your market or to subscribe today to the Pallet Profile Weekly (www.palletprofile.com) and Recycle Record (www.recyclerecord.com).  

            A third pattern of change has been the nail market. For the better part of the over thirty years I have written about the pallet industry and its markets, nail prices were mostly stable. While the nail supply picture experienced some changes, and the product itself changed over time, nail market prices typically stayed fairly stable. Then a couple of years ago, we saw nail prices skyrocket with increases in the neighborhood of 75% in about a half a year. They came back down over the next year and have gone back up again this year. More than ever before, the pallet industry is functioning in a worldwide environment. Certainly the steel industry is a worldwide market, and we have no choice but to follow the trends up and down. Globalization has forever changed supply chains as well as customer expectations.

            A fourth critical pattern is overall volatility. Certainly if the world is unstable, how could pallets which move the world not see similar variations? Communicating these changes can be difficult when pallet users see lower costs for repaired pallets and higher costs for lumber and new pallets and want to know why these discrepancies exist.

            While there is much uncertainty, there are signs of improvement. Most pallet companies seem to agree that things are improving although very slowly. Although most are not setting records, they are experiencing sustained growth patterns. That’s the good news.

            The bad news is that nobody knows how long the current recovery will last. There are some concerns that could cause economic aftershocks, especially debt levels by central governments around the world. The Kiplinger Report recently reported that countries around the world are “swimming in red ink.” Many of the established world economies are experiencing debt to gross domestic product percentages that are scary. Major world economies have debt to GDP percentages that range from about 70% to almost 125%. (U.S. 69%, U.K. 75%, Germany 75%, India 77%, France 79%, Japan 106%, Italy 115%, and Greece 124%). By comparison, countries such as Canada, China, Australia, Mexico, and even Russia and S. Korea, have much lower percentages from 35% to considerably lower. Many of the countries with high debt to GDP ratios have good credit ratings. One has to wonder how long some countries can underwrite the debt of others.

            I continue to look for the new patterns in the midst of constant change. Maybe the only stable conclusion one can reach any more is that there is no such thing as predictable patterns.

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