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Market Update: Itís 2012, Do You Know Where Your Cores Are?
The impact of fewer new pallets being built is faster cycles in the recycle pallet market, which has accelerated the aging of the available white-wood pallet pool. Only time will tell if the current core dilemma is a true paradigm shift or another drastic shift in market dynamics.

By Jeff McBee
Date Posted: 1/1/2012

††††††††††† It was August of 1999. I remember it like yesterday. CHEP and Wal-Mart had jumped in bed together. CHEP was signed on to handle Wal-Martís dock sweeps. Wal-Mart was sending out letters of advocacy, endorsing the use of blue pallets wherever possible.

††††††††††† As part of the deal, CHEP was in charge of all of the white-wood coming out of the Wal-Mart distribution centers (DCs). CHEP decided the best way to keep track of the blue pallets going in and coming out of Wal-Mart DCs was to flush all of the white-wood out of Wal-Martís DCs, and put everything in Wal-Martís system on CHEP pallets.

††††††††††† There was a veritable flood of white-wood pallets hitting the market. Recyclers were unprepared for the sudden influx of cores. Prior to CHEP making this move, core supplies had been fairly tight. The sudden abundance caught recyclers by surprise. The perception was that there was a glut of pallets. Many recyclers worked under the assumption that the oversupply was the new norm. It was not.

††††††††††† None of the marketís fundamentals had changed. Pallet manufacturing was not creating extra units for the white-wood pallet pool. Demand in the recycled pallet market was largely unchanged. The only thing that had changed was that white-wood pallets that had been in Wal-Martís DCs were now out in circulation. One of the marketís dynamics had changed, but not any of its fundamental characteristics.

††††††††††† Unfortunately for the recycled pallet industry, too many recyclers didnít have a good read on the situation. Core prices didnít react as much as finished goods prices did. The result was a thinner profit margin.

††††††††††† Recyclers continued to work with the thinner profit margin as competition kept recycled pallet prices suppressed.

††††††††††† Then it happened. The market had slowly but surely digested the oversupply of white-wood pallets, absorbing them into the overall white-wood pallet pool. Readers of our market reports were in tune with the situation all along, but were still left somewhat to the whim of the marketís herd mentality.

††††††††††† The white-wood that had been forced out of Wal-Mart actually was an advance payment of white-wood units that would have trickled out over months. Those pallets were no longer in Wal-Mart DC racks. The supply tightened even worse than before. Recyclers would find core supplies tighter than ever and demand was solid-to-strong, making hand-to-mouth supplies a virtually permanent situation.

††††††††††† UntilÖ Early 2009, I remember it like yesterday. The economy was in full blown retreat. The slow down started the ball rolling and the shift took about a full year for the industry to feel the full impact.

††††††††††† The sluggish economy created a lackluster market that after lingering for over a year became a big problem.

††††††††††† The problem started with DCs addressing the slow economy. DCs began to reduce inventories as the economy slowed. This meant fewer pallets under load which pushed a large volume of white-wood pallets out into circulation.

††††††††††† Pallet recyclers were left holding the bag. Lackluster activity and a much higher flow of inbound pallets created heavy inventories on recyclersí yards.

††††††††††† Ready-to-go pallet prices became extremely competitive. Recyclers had too much cash tied up in the suddenly-heavy inventories. The competitive market began to drive down pallet prices throughout the market and recyclersí yards were losing money as inventories lost value. Inventory devaluation was having a large negative impact long before core prices began to retreat.

††††††††††† The combination began to create some very aggressive pallet pricing in the pallet market especially in the market for #2 GMA pallets. Pricing for #2 GMA pallets began to resemble a suicidal game of musical chairs as some recyclers offered cutthroat pricing in an effort to reduce inventory by turning it into cash at any price.

††††††††††† Prices for #2 GMA pallets surrendered so much ground in the price wars in some areas that #2 GMA pallets dropped below where core prices were a year earlier.

††††††††††† Many recyclers took a much harder line on paying for cores, in some cases even refusing to pay for #2 cores. As companies began to de-emphasize #2 GMA pallets, some took the drastic measure of grinding or dismantling a much higher volume of #2 GMA pallets than at any time in the past.

††††††††††† Once again, none of the marketís fundamentals had changed. The flood of pallets wasnít the result of extra units coming from newly manufactured pallets. And again, the only thing that had changed was the location of white-wood pallets that were now on recyclersí yards.

††††††††††† The core glut of 2009-10 didnít last long after the peak of trouble when some large volumes of #2 GMA pallets were being ground. Within the next few months the market digested the excess. The market was right back where it was before, only once again, a little worse off.

††††††††††† UntilÖ Early 2011, I remember it like yesterday. This time the shift went in the opposite direction. Costco launched its 100% block pallet initiative. Around the same time, the market was just beginning to feel the impact of the Brambles/IFCO marriage.

††††††††††† The consequences of these two separate but interacting factors were felt in far faster fashion than anyone could have projected.

††††††††††† The full impact on the market is difficult to measure in some ways and very definable in others. In either case, the CHEP/IFCO relationship is a profound, yet new market factor.

††††††††††† Neither Brambles, nor CHEP nor IFCO have revealed their intent in the whitewood market. This leaves very little information confirmed by the principals on the companyís plans going forward, but there are some strategies coming to light as pallet recyclers encounter the company in various new competitive areas.

††††††††††† One of the earliest felt factors has been the companyís current trend of internalizing white-wood core supplies for IFCOís use. This has been one of several shifts for IFCO that has become a center of attention in conversations throughout the industry. This new trend is magnifying the industryís core supply problems.

††††††††††† The other factor to be considered in Costcoís 100% block pallet initiative is the volume of white-wood stringer pallets being moved through the mass merchandiserís system. This move resulted in fewer new units being introduced into the white-wood pallet pool.

††††††††††† The overall condition of the whitewood pallet pool suffers as fewer new 48x40 pallets are built.

††††††††††† The impact of fewer new pallets being built is faster cycles in the recycle pallet market, which has accelerated the aging of the available white-wood pallet pool.

††††††††††† Only time will tell if the current core dilemma is a true paradigm shift or another drastic shift in market dynamics. There are too many moving pieces to clearly see where everything will settle.

††††††††††† Will IFCO/CHEP continue its recent strategy? How will the 9BLOC pool impact all of this? The only thing that is certain is that the core supply shortage has returned and the impact is currently stronger than ever.

††††††††††† (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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