Web Articles   Digital Editions
Digital Edition Archives



Market Update: How Busy Are We? A Look at Pallet Demand East of the Rockies
Raw Materials Shortages: Two large factors have hampered raw material availability in low-grade hardwood markets, weather and competition for the product. The oil exploration sector as well as other key industrial users continue to outbid pallet companies for material.

By Jeff McBee
Date Posted: 9/1/2013

                Raw material shortages are the pits. Everything about a raw material shortage isn’t quite what it appears to be. Don’t read me wrong; 99% of it is everything that we see. It’s the other 3% that you can’t trust.

                A good example of a 102% illusion is from March of this year. Industrial softwood supplies had grown ridiculously tight. Raw material prices were soaring. The price climbs were as steep as any I have seen in my twenty plus years of tracking the industry.

                The tight supplies and soaring raw material prices were more than many western pallet suppliers could handle. Finding raw material at any price was difficult. Raw material inventories dropped to where pallet manufacturers were delivering partial loads to ensure that customers didn’t run out of pallets. Lumber sellers and mills were faced with similar challenges.

                There was one more twist in that ever-thickening plot. Pallet demand took off. Or at least that was the impression that pallet manufacturers got from the market.

                When western pallet suppliers were experiencing the upturn in pallet demand during the raw material crunch of the spring, I was constantly suspicious. I would ask pallet suppliers frequently if some of it was customers’ knee jerk reactions to the market. I was repeatedly told that my suspicion was not the case.

                The typical knee jerk reaction process goes something like this: raw material gets tight, prices climb, the pallet supplier raises his pallet price and warns the customer of poor raw material availability. The customer, who has two – maybe three – vendors supplying pallets gets fearful and places orders with each of them. Suddenly, in the midst of a raw material shortage, pallet demand has increased quite a bit. 

                So pallet manufacturers were scrambling, sometimes building partial loads and doing whatever they could to stay in front of an impossible market.

                Then in late April it was over. Raw material supplies eased. Raw material prices began to back off. Suddenly – as quickly as it arrived – pallet demand returned to unenthusiastic levels. 

                Customers who had covered themselves due to warnings from pallet suppliers still had pallets on order but sensed the market’s turn and simply stopped ordering until their inventory was back in balance.

                Things are back in a more normal state in the softwood market, but low-grade hardwood supplies east of the Rockies are in turmoil.

                The raw material scenario east of the Rockies has been in a rapid decline all summer. 

                Conditions governing raw material supplies are close to the worst kind of “perfect storm” as low-grade hardwood availability continues to tighten.

                Two large factors have hampered raw material availability in low-grade hardwood markets, weather and competition for the product.

                Weather has been very problematic and has been far removed from anything that would be considered normal summer weather. There are many areas that have been exceptionally wet. The precipitation has sometimes been heavy, but most often has been persistent, nuisance rains. The wet weather has impacted low-grade hardwood supplies and the shortages spread out farther by the week.

                 The competition for limited low-grade hardwood supplies is an equally large factor. Industries that are involved in oil exploration have been big players in low-grade hardwood markets. Products such as crane/dragline mats and board road are paying nearly double what pallet cants bring. Sawmills are naturally drawn to supply these products at these price levels.

                  Competition from other industries such as rail ties, flooring and framestock are creating strong competition too. The biggest issue for the pallet industry is that it doesn’t have the spending power of these other low-grade hardwood products. And so the hardwood pallet market east of the Rockies is facing quite a shortage.

                Along with the low-grade hardwood shortage, pallet demand is on the rise. Some of the increase is very real. There are some companies that are enjoying record years measured in units produced. This is good news. Others are seeing solid activity with good growth. Overall, everyone seems to be logging better pallet demand than they have seen in the past five years since the economy turned south.

                Is some of this demand knee jerk? It could be. Overall, most of the activity seems to be true growth – not exceptional – but decent growth nonetheless.

                The issue that I perceive in talking with pallet suppliers is the current confidence levels. Pallet suppliers’ confidence levels are often a direct reflection of what they hear from their customers. Most pallet suppliers are feeling very good about their activity levels, at least for the moment. Despite that optimistic feel, they have a concern about the market only a little further out.

                The general consensus is that business is good – or even better – right now. But ask them about the forecast beyond eight weeks and there is no read, which keeps them from being confident beyond the current market.

                This is a direct reflection of end users who continue to run their businesses in hand-to-mouth fashion and do not display any long term confidence in the economy. 

                The trend also can be seen in hiring practices within big business. Nonfinancial corporate America is sitting on 25% more cash than it had when the economy turned south. The numbers only include U.S. holdings as offshore cash stashes aren’t accurately measurable.

                Earnings news has been good, but it hasn’t spilled into the employment numbers. This isn’t new news. The trend of big business not hiring and holding cash has been a recurring theme for nearly three years now.

                So, as an industry, we are busier than we have been in five years. Levels are solid and – in some cases – quite strong. The catch is that the hand-to-mouth trends of our customer base may remain in place for quite a while.

                (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.)








Do you want reprints or a copyright license for this article?   Click here

Research and connect with suppliers mentioned in this article using our FREE ZIP Online service.