How quickly things can change! When this column last appeared, the mild winter was pushing raw material availability to the brink of a glut, and everyone was anticipating the bottom dropping out of the market.

Low-grade hardwood availability has tightened in most areas east of the Rockies. The delicate balance in industrial hardwood supplies has been disrupted by the recent upturn in pallet demand.

The largest factor in the tightened hardwood supply is the suddenly resurgent industrial hardwood market, including pallet demand. The tie market has applied the most pressure on industrial hardwood markets, but sawmills also report that framestock, landscape and mining timbers, blocking and board road matting all have been strong markets that have contributed to the tightened supply.

Some contacts report no difficulty obtaining low-grade hardwood supplies. These contacts all have one thing in common: business is well below where it should be, thus leaving the delicate balance in place. If business were strong, however, they would have trouble with availability.

The weak softwood market also has been a contributing factor. The Southern yellow pine market has been so poor that it has limited logging activity and, as a result, tightened the log supply.

Frequent rain across the Midwest and Northern Tier states also has limited raw material flow. When the weather looks like things will dry out, another wave of showers moves through. Rainfall has not been heavy, but it has limited logging nonetheless. The limited logging activity has led to problems for paper companies; some have put bonuses on pulpwood, which has had a negative impact on log supplies for scragg mills and grade mills.

The tight supplies, whether market-related or weather-driven, have begun to place upward pressure on cant prices across the country.

Pallet demand strengthened throughout June and July, hitting a pace as strong as we have seen in several years. August was showing signs of not being as robust, but business was still solid in most cases. Many companies reported strong demand and some even were running overtime. The over-all feel of the market remained decidedly brisk with many manufacturers running close to capacity and frequent reports of running overtime. There were reports of hot-and-cold demand, but they have been far less pronounced recently.

Short lead times have begun to cause problems for pallet manufacturers and customers alike. The problem for the customer surfaces when the last-minute order cannot be accommodated; pallet suppliers are not able to fill every ‘today’ order. This goes hand in hand with the tight labor market, which continues to be a problem with few solutions. The short lead times that have become commonplace in the pallet industry are magnified by the difficulties of hiring and keeping good workers.

Pallet prices have begun to edge up along with the higher raw material costs. Working with thin profit margins has forced pallet suppliers to pass along raw material increases instantly to customers. Stronger demand levels have helped to embolden some pallet manufacturers to move prices in accordance with lumber price movements.

The Western softwood grade market has experienced one of the most bizarre summers ever. Over-production remains the buzzword as mill production has out-paced fairly strong demand on the West Coast.

Lumber futures traded down limit on numerous days as the grade market endured a prolonged slump during what is normally its busy season. Although housing numbers continue to slip, this year’s pace has remained ahead of last year’s.

The grade market quandary has few answers other than production curtailments. Mills are hesitant to make the sacrifice of pulling back and letting competitors benefit. Announcements and rumors of shut-downs and curtailments have been well circulated, but most of the actual down-times were typical for the time of year.

During the slide an abundance of offerings of higher grade material became available at prices that are attractive to the pallet community. For several weeks, standard and better offerings were available for $200 delivered to northern California. This is below what economy was selling for less than a year ago. The deals on standard and better material recently disappeared, but attractively priced utility material still was readily available.

The availability of pallet material climbed to absurd levels. Pallet lumber buyers have not been looking to buy any material with the possible exception of filling immediate needs. Inventory replenishing is the last thing on most buyers’ minds. Many buyers are looking to trim inventories, not build them. Transactions on economy are more a matter of negotiation than anything else. The volume of upper grade material has hindered the sale of economy stock.

Economy 2x4 availability grew to glut proportions, particularly short length material. Mills with reputations for offering better quality had the best success moving their material, usually by price concessions and counters, but even these mills began to find economy difficult to move.

Availability of economy 2x6 was tight earlier in the year and still is not quite as over-supplied as 2x4. The improved supply was enough to place downward price pressure on the product, and this began to close the price gap between 2x4 and 2x6. Even though the gap narrowed, it remained too wide to convert many of the 4-inch dominated pallet specs back to a 4-inch and 6-inch mixture.

The cut stock market slowed quite a bit during the recent slump. Cut stock suppliers managed to move enough material to get by but prices and volumes were well below seasonal expectations. Concessions were often the factor that made material move. The concessions were not always price; we received reports of billing terms being offered to spur business.

Pallet demand on the West Coast has been neither good nor bad but clearly behind seasonal expectations. Most contacts report good business levels, just not as strong as they would like to see, particularly considering the time of year.

The sluggish pallet demand coupled with the fade in lumber prices placed some downward pressure on pallet prices. This was more the result of some companies that became overly aggressive rather than a natural market correction. Most mainstream pallet manufacturers were trying to work completely through their higher priced inventory before they even thought about dropping pallet prices.

Incoming pallet core supplies are generally tight throughout the U.S. Some regional differences have surfaced, however; there are pockets where core availability actually is strong. Some regions are having more troubles with #1s than others while other regions are struggling with cores in general. Some of the worst problems with core supplies are in the South, where the availability of #1 pallets has been a struggle for quite some time. Contacts in the South report the inbound mix to be at the heart of the problem; it is not isolated to the South, but it seems to be the most pronounced in this region. Contacts throughout the country report the inbound mix of pallets has shifted decidedly toward #2s.

The core supply on the West Coast has turned into a case of the haves and the have-nots. The core shortage is evident along the entire West Coast, but the supply is tightest in the Northwest.

The deterioration of the available pallet pool has been a topic in the recycling community for years, but contacts contend that deterioration has accelerated. Third-party management and pallet recycling itself have been factors in the decline of the quality of the overall pallet pool.

The ripple effect of Wal-Mart’s conversion to Chep pallets continues to
be felt throughout the recycling community. It was assumed early in the
conversion that the core supply would diminish quickly when Chep began
doing dock sweeps for Wal-Mart distribution centers.

However, the Chep/Wal-Mart relationship actually has improved core supplies in these areas. The switch by Wal-Mart distribution centers to blue pallets has freed inbound white pallets into the available pallet pool.

In this case, third-party management is helping to improve the condition of the over-all pallet pool. The good quality #1s that Wal-Mart previously would have put to use now are going into the over-all pallet pool. Contacts report the percentage of blue pallets in the inbound mix at Wal-Mart distribution centers has shifted very little since the Chep/Wal-Mart relationship began.

Acquisition costs have held stable in all regions following several months of isolated instances of higher core acquisition costs. We have received a few reports of lower acquisition costs. Many in the recycling community have the opinion that raising prices paid for cores only raises costs and rarely improves supply. The largest shift in core acquisition costs recently is the evidence of a disturbing new trend developing in the upper Midwest; we have received numerous reports of recyclers paying for non-GMA cores.

Recycled pallet demand is solid to strong in all areas, but the pace of the market has dipped some recently. Over-all demand is still good but is nothing like the frenzied pace that has become the norm in the recycled market.

Pallet demand in the recycled market has favored #2 GMAs for some time, and contacts report demand remains slanted towards #2s. Availability is the main concern in the trend towards #2s. Some markets will always require #1s and will maintain more of a balance between #1s and #2s.

The entire pallet community, both new and used, is struggling with labor shortages. The labor-intensive nature of the recycling business magnifies the problem.

Recycled pallet prices have been holding steady in all regions. Recycled #1 GMA pallet prices are holding steady in all regions. Prices for #2 GMA pallets have consistently edged higher all year but now seem to be leveling off.

(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, the only weekly report dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly, call (800) 805-0263 and ask for Jeff.)