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2000 Was a Year to Remember or Forget
Market Update: 2000 Was a Year to Remember or Forget

By Jeff McBee
Date Posted: 12/1/2000

I’ve always been skeptical of forecasts, particularly with the weather. Everyone knows local meteorologists have their hands full with tomorrow’s forecast, much less the five day outlook. But when the National Weather Service lets loose with its "extended forecasts," I cringe.

These outlooks are issued from 2 weeks to 13 months in advance for the lower 48 states. People in the electronic media like to get these seasonal forecasts and put them out for general consumption, which stirs folks up for a few days. Then when they are as far off base with the extended forecast as they are with the five day outlook — nobody remembers. In my humble opinion, this ‘artistic license’ tends to embolden the forecasters.

When I was given my assignment for my quarterly column, I was asked to make this a year end review and to also give a look ahead. So I will attempt to take a look into my murky crystal ball. So for those of you who want to keep score you may want to hold onto this one.

You can blame it on the millennium (if you don’t subscribe to 2001 being the real millennium), but 2000 has been a strange year for the pallet industry. From Y2K build-ups to the softwood market crash, 2000 was quite a year. For some it was a year to remember. For others, a year to forget — if they can.

Pallet demand during Y2K was a chain of cycles. Hot demand, cold demand, hot-and-cold demand, 2000 had it all. Pallet demand opened the year hot for hardwood pallet producers, but the Western softwood market opened in expectedly slow fashion. Then the two headed in opposite directions. Pallet demand in the West improved, exceeding modest seasonal expectations and setting a hopeful tone for the new year. Hardwood pallet producers began a prolonged period of lackluster activity that pallet suppliers blamed on Y2K stockpiles. Pallet demand for much of the remainder of the year failed to achieve expected levels in either market.

Pallet recyclers saw the year open in the same fashion as the close of 1999 — white hot. Then near the end of summer, the market took a funny twist. The demand for recycled pallets began to falter. Demand was still solid, but was far from the frenzied pace that had become the norm over the past few years. The slower demand levels coupled with the Wal*Mart/Chep relationship began to have an impact on core supplies. Suddenly the core drought had come to an end, at least for the moment.

Pallet demand in the west was bolstered by agribusiness activity late in the year, but pallet demand for 2000 turned out to be somewhat of a disappointment. Pallet demand on the hardwood front heated up near the end of the year in a number of areas east of the Rockies. This was the good news. Raw material was the bad news.

The story on raw material availability also provided more twists than usual. The upper grade softwood market always goes up in the spring — right? Not this year. Winter weather held on a little longer, while production in the west roared. Softwood demand eventually got up to speed, but never caught up to production levels. This resulted in a lumber market that faded most of the summer. The threats of extended downtime at mills never materialized due to solid to strong pulp and paper markets, so the softwood market continued to drift the rest of the year.

The market for low grade hardwood behaved almost as quirkily as the softwood market. Most of the eastern half of the country experienced a very mild winter for the third consecutive year. When spring arrived, hardwood supplies were overly abundant and the market appeared poised for a tumble, much like the spring of 1995. Factors came into play that were not evident in 1995. Different market forces took turns keeping low grade hardwood supplies in check. Pulp and paper companies paid bonuses after a bout with wet weather. The wet weather sent some loggers to pine tracts on higher ground. The industrial markets began to take a larger slice of the pie and suddenly what began as a surplus, was now a tight supply — especially for the time of year.

By this time stronger hardwood pallet demand and the not so robust raw material supplies were on a collision course. At the time of this writing, there were no crisis situations, but the lack of surplus hardwood for building winter inventory was forcing apprehension levels higher by the minute. Most contacts are finding enough material for current needs, but...

Pallet prices were a study in contrast from East to West. The western pallet market has enjoyed a measure of comfort with pallet prices. The drop in lumber prices was quick and pallet prices did not react as quickly or as dramatically. This left profit margins closer to traditional levels. Lumber prices continued a slow downward drift, as did pallet prices, but margins remained steady.

The story of pallet prices for the hardwood market was not as healthy. When fuel prices rose early in the year, pallet suppliers were already dealing with thin margins and were quick to pull the trigger on price increases. Some increases were simply higher pallet prices, while others opted for a fuel surcharge for their increase. The good news was that the increases were readily accepted. The bad news was that this was the end of higher pallet prices for the majority of pallet suppliers east of the Rockies.

Low grade lumber prices continued to press higher while pallet prices did not. Some pallet producers were unable to gain needed increases despite being so busy they had to run overtime. The reason? Competition. There always seems to be someone willing to buy business even in the strongest markets.

The Future

What does the future hold? This winter will prove to be interesting. The softwood market will find stability over the winter. Winter holiday shutdowns will be longer than normal. The larger companies have been threatening extended downtime for a while now, and will follow through now that the pulp and paper markets are showing signs of weakness.

Will this allow the softwood market to recoup? Probably not. The five year quota system will be drawing to a close. The U.S. has already informed Canada they will not pursue a renewal of the pact. My guess is that a countervailing duty will be implemented. Canada has fought such measures in the past. Enough Canadians were blocked from shipping stateside because of the quota that the resistance to a countervailing duty will be minimal.

This could be a tough winter east of the Rockies. Much of the current apprehension centers around the lack of winter weather for the past several years. The general consensus is that the country is due for a real winter. I agree (not that
I’m a big fan of winter), but we have gotten off easy for too many consecutive winters.

If this turns out to be the case, it’s Katy bar the door. Many sawmills are in for a lot of trouble. Log supplies are not even close to traditional levels. Some small mills have not been through a tough winter. Cash is a major hurdle — not just for small or even medium sized mills. There are some of the larger mills that are undercapitalized as well. Some mills simply are not healthy enough to survive a tough winter.

Higher lumber prices have traditionally been good for pallet manufacturers. The higher raw material costs tend to push pallet prices higher, restoring margins lost during long periods of stagnant pricing. That still holds true -- to a degree. Higher lumber costs could be a benefit to the pallet community unless the moves are steep. The resistance from the purchasing community could make the pallet business even more competitive than ever. Those who choose to (or have to stay) with wooden pallets will be more deliberate and demanding than ever before. Every order could be contested.

Higher prices could shift a stronger balance to recycled pallets, third party services or alternative materials.

This isn’t all gloom and doom. If we do have a tough winter, those that come out on the other side will enjoy a healthier industry. But who knows, maybe old man winter will pass us by one more year.

(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.)

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