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Market Update: Are We There Yet? Looking for the bottom of the softwood market
Significant softwood lumber spikes in the West earlier this year felt extremely rate until you stop to compare it with a similar trend a few years ago. Itís strange how we forget the past in the pressure of the present.

By Jeff McBee
Date Posted: 7/1/2013

                Back in December, the western softwood grade market began to see some surprising trends.

                There was upward pressure on upper grade material. The trend befuddled even the savviest of traders. Prices were trending upward across all grades. That is far from the expected behavior for the dead of winter.

                Mills were caught off-guard as much as the rest of us. Many mills were operating more according to the calendar than the actual demand. Production had been drawn back, but demand was ramping up.

                Hindsight tells us that multiple factors had set the stage for the North American softwood market to heat up. And heat up it did. Upper grade material had climbed in price to a point that first quarter pricing for offshore markets was enough to keep China out of the upper grades.

                Then the unexpected happened. Chinese lumber buyers decided that since the #2 market had become too expensive that they would simply buy lower grade stock. That is when the market really hit the fan. With China buying only #3, utility and economy material, there was a huge supply shortfall in the market.

                Prices began to skyrocket. Supplies were practically non-existent. Pallet suppliers were juggling partial loads to ensure that customers didn’t run out of pallets. Sawmills, pallet mills and their customers were all in a panic trying to make the necessary adjustments to keep wood moving and customers appeased.

                The ensuing turmoil was like nothing we had ever seen before. Or was it?

                The turmoil that ensues when a market soars like that which we saw earlier this year often makes it difficult to keep perspective. After all, during the scramble of skyrocketing prices and nearly non-existent supplies, it’s hard to remember the market ever being this difficult.

                What if I told you that the market was quite similar in 2010? The price and availability of industrial softwood behaved in nearly identical fashion in 2010. That seems like such a long time ago now. Yet at that time pallet lumber buyers viewed the conditions as a watershed event. Our western pallet market column for February 19, 2010 opened with a quote from a contact, “This is a market that we will remember for many years.”

                We remember, only if we have an opportunity to reflect on it, which can be difficult when the market goes crazy.

                 The accompanying line graph tells the story very well. The two vertical X axis have different values as this year’s softwood run started at a higher level than the 2010 market, but the chronological timeline follows distinctly similar trends.

                The factors that influenced the tight supplies that fueled such crazy price spikes were in some ways different and similar in others. In 2010, like this year’s run, there was very little wood to be had. Another common theme between the two years was that the run started early. Pallet manufacturers never saw the cheap winter lumber with which they traditionally build an inventory that insulates them from the bullishness that traditionally accommodates the upward move of the grade market.

                The grade market did move upward at a sharp pace both years. Production levels didn’t react much to the market run either time.

                What did vary for the pallet industry was activity. Pallet demand was fairly limited in 2010 as the economy was still battling strong headwinds. This year, pallet demand was stronger but so was the grade market.

                Another area where the two years were different was the offshore factor. Offshore markets were a strong factor both years but the impact was felt due to different factors. In 2010, the market was tight because offshore markets were taking every stick of upper grade material. That meant that local markets were left to battle for industrial softwood offerings. The quality of wood suffered more.

                This year, offshore markets had focused more on industrial softwood markets. The volume of wood available to the pallet industry was very tight. Inventories dwindled but there were no surpluses where money was going to cure the problem.

                The fall of both markets looks far more similar. The grade market faded in both cases. Suddenly Utility material pricing was in the lap of economy prices both years. The price free fall in industrial softwood prices was as fast falling as it was going up.

                What kept the softwood market in decline in 2010 is that Utility material became a much better value than economy material. In fact, many pallet manufacturers were buying Standard & Better material in 2010. That kept the pricing of economy in a soft posture until late October when the market began to climb at what would be viewed – by traditional standards – as out of time/early.

                Only time will tell how the market will react going forward, but current trends point to a long hot summer for sellers of industrial softwood. 

                (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 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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