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Market Update: A Tale of Two Markets-- Watching As Similar Markets Travel In Opposite Directions
Market analyst Jeff McBee describes the latest development in the low-grade lumber markets.

By Jeff McBee
Date Posted: 3/1/2011

††††††††††† Trends in the hardwood market east of the Rockies are shifting. Half of the hardwood market is experiencing a change in conditions, while the other half is following patterns that were established quite a while back. The radically divergent trends follow a North and South line.

††††††††††† The two very distinct markets with very divergent trends are not the result of weather the way one might expect during the winter. Ordinarily a North/South split this time of year would, more often than not, point to weather conditions.

††††††††††† That is not the case at the moment. Financial trends - money and market factors are driving the current trends that are pointed in nearly opposite directions.††

††††††††††† Weather has had some impact, but has been a modest factor from a big picture view of the market. Winter has been colder than in recent years. Snowfalls in many areas have been heavier than in recent memory also. Still, the impact on the overall forest products industry has been minimal.

††††††††††† Snow in the Northeast has been waist deep in the woods since before Christmas. These conditions may have been problematic in the past, but they are little more than a nuisance for modern log crews.

††††††††††† Current market conditions split the country into northern and southern markets. The separation is caused by financial trends and operating procedures. The difference in strategy (or lack thereof) makes a very clear dividing line. The difference in results is not subtle.

††††††††††† A big picture look at the common trends shared by both markets is very revealing. The biggest shared trend is the grade market, which was surprisingly solid throughout the summer. Mills in both the North and the South had healthier log supplies than they had held in 18 months.

††††††††††† During that same time everyone who ever used low-grade hardwood in an industrial purpose was in play. It seemed that every low-grade hardwood user had thrown their hat into the ring to join the bidding war. Rail ties and switch ties were strong. Board road, drag-line and crane-mats were in high demand. Flooring and framestock were in high demand.

††††††††††† It didnít help that paper companies were aggressively trying to replenish inventory. Everyone who had ever participated in low-grade hardwood markets had returned to the market.

††††††††††† This drove prices and demand. Almost all of the hardwood sawmill industry had a pep in its collective step.

††††††††††† Almost all of those markets managed to replenish inventory or saw demand falter. Sawmills watched low-grade hardwood demand drop off considerably as a result.

††††††††††† Low-grade hardwood demand has been more consistent at lower levels since activity began to slump.This is true in all regions.

††††††††††† Low-grade hardwood demand is now focused on two sectors Ė pallet material and rail ties. A few months ago nearly all sectors that traditionally use low-grade hardwood were all vying for the limited supply. Since then, activity for board road, crane-mats, flooring and framestock have all pulled back from the market. Paper companies that were aggressively trying to replenish inventory have also pulled back.††††

††††††††††† Most of the slump was the result of many sectors being filled or activity tapering in those competing industries.

††††††††††† This was near the end of summer. And that is where the strategic differences, supply differences and overall market differences began to surface.

††††††††††† Northern mills continued to approach the market the way they have since the economy turned south in late 2008. Sawmills in the North approached the market with a financial caution.

††††††††††† Mills opted to keep log decks in check, much like they had a year ago. Poor grade markets and the sluggishness in the industrial hardwood market reinforced their concern.

††††††††††† Log buyers were disinterested in any surplus logs, as production levels had been scaled back to match lackluster markets.

††††††††††† Log decks in the North are generally light. Mills are content to run log
supplies fairly close to hand-to-mouth levels.††

††††††††††† This leaves Northern markets dealing with low-grade hardwood supplies that are tight or downright undersupplied.††

††††††††††† Mills in southern markets have approached the market differently since late last summer and are operating in a nearly exact opposite fashion.

††††††††††† Mills in the South seized the opportunity when log supplies improved as paper companies were full. They were laying in large log decks, when log prices began to sag. When log decks began to fill, log prices began to pull back some. Undaunted, the mills continued to buy.††

††††††††††† Mills continued to run stronger production schedules, regardless of trends in the grade market.

††††††††††† The higher production in the South has resulted in strong low-grade hardwood supplies. The strong supplies are only getting stronger.

††††††††††† The higher production brought stronger low-grade hardwood supplies. As low-grade hardwood supplies grew, demand was tracking in the opposite direction as many of the previously strong market sectors had bowed out. Availability grew progressively stronger, and the predictable happened.

††††††††††† It is, therefore, no surprise to see some soft cant prices in southern markets.

††††††††††† It would seem that Northern mills adjusted to the market conditions better than southern mills. That might be the case. It is nearly impossible to always see why a market behaves the way it does.

††††††††††† This may be a case where the mills in the North and the South played the market conditions correctly. Without seeing the motivation, profit and loss statements and monthly obligations of individual mills, we can only wonder.

††††††††††† For now it is a tale of two markets that are starkly different.

††††††††††† (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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