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Market Update: Calm Before the Storm... Is there more trouble on the horizon?
Market analyst, Jeff McBee, looks at the trends over the last year and speculates that conditions may be ripe for more of the same into the coming year, which means you need to be ready for price spikes at any time.

By Jeff McBee
Date Posted: 11/1/2013

                Ah, the good old days… remember when low-grade hardwood availability was kind of tight, but you were able to supplement your inbound raw material with cheap softwood? Yes, those were the days.

                But the good old days had to come to an end. Let’s revisit the end of cheap softwood east of the Rockies. It all started in the West.

                It was early November, 2012. It was a day like any other day in the softwood market in the Pacific Northwest.  Then the market began to tilt.

                Some background history is in order. Prior to November, 2012, softwood prices had fallen dramatically largely due to the impacts of the recession. At the time, it was not unusual to see softwood from the Northwest and western Canada to be sold in the Upper Midwest. The affordability levels of softwood were cheap enough that some pallet manufacturers began to using the less expensive softwood in place of hardwood.

                Then it happened. China was becoming increasingly aggressive in its lumber purchases. Softwood prices in the Northwest and western Canada were being driven progressively higher. As grade prices soared, industrial softwood prices followed. Then China began taking heavy volumes of economy and utility material. Suddenly there was very little pallet material on the West Coast. Prices eventually were around one hundred dollars higher.

                Some may be wondering how that impacts markets east of the Rockies. As mentioned above, it is not unusual for some of that material to find its way into the Midwest. Price and available on the West Coast made economy softwood nearly impossible to find or pay for and eliminated that stock from the Midwest.

                That created a raw material vacuum east of the Rockies. Then the problem became an eastern softwood and hardwood problem. Hardwood pricing made it a slightly better value, but there wasn’t enough of it around for existing business, much less the increased demand the market was about to endure.

                So despite the fact that the earlier exodus to lower priced softwood didn’t represent a large volume of the market, but the volume was easily large enough tilt supplies. Buyers who had jumped to softwood, found very little success when they looked to jump back.

                Softwood prices east of the Rockies were reacting in similar fashion. Southern Yellow Pine (SYP) prices rose nearly as fast as the western softwood prices had.

                Hardwood prices climbed at a pace slightly below the pace of softwood increases, but part of the price anchor was the understanding that there wasn’t enough hardwood to go around. The hardwood market had already absorbed plenty of upward pressure from competition from other industries using low-grade hardwood.

                Sawmills had leaned heavily on industrial hardwood markets throughout the economic downturn. But by last November, the Hardwood grade markets were improving. The improvements in the grade market gave sawmills better, more profitable options. The industrial hardwood sectors that were crucial during the poor economy were still a large part of the pie, but sawmills were not diverting as much of the log to low-grade hardwood markets as they did earlier.

                This created a bigger problem. Improving grade markets were reducing the volume of low-grade hardwood available at a time when demand for low-grade hardwood was growing. The list of industries vying with the pallet industry for the smaller low-grade hardwood pie include oil exploration products such as board road and crane/dragline mats, rail ties, flooring and framestock. All of them were – and continue to be – solid demand markets that can and do easily the pallet industry. In some markets, these industries were paying upwards of $100 more per thousand for basically the same material.

                So the vacuum created in one area of the country created a Rubik’s Cube effect across many markets.

                By late April the softwood market had begun to retreat. In some cases, it returned to similar levels to those prior to the start of the insanity.

                The hardwood market didn’t experience any change all summer. There was plenty of rain, but the competition for low-grade hardwood was a bigger problem. By July pallet manufacturers were already talking about their concern for building a winter inventory. Their fears proved very much true.

                There is an odd aspect about the current state of the hardwood market. The supply/demand balance seems out of whack – especially in low-grade hardwood. Prices are solidly strong because production is lagging behind demand. Traditionally a second shift in the summer months is a given for mills east of the Rockies. That hasn’t been the case since the beginning of the economic downturn in 2008 and it wasn’t the case this year.

                There are two issues that are key factors. One is that mills usually consider eight weeks to be the time that a second shift takes to become efficient. Most did not/do not have the confidence in the market to step out to add a shift, which would include the hiring of more employees, which many companies are very reluctant to do in the current economy.

                The other issue is infrastructure, which is quickly becoming a big problem for the forest products industry. Shortly prior to press time I was speaking to a pulp buyer who said that despite eight weeks of nearly ideal weather, he had not made any gains in building a normal winter inventory.

                I know that this was a rather lengthy walk down memory lane. But the history lesson is certainly worth review. As the old adage goes, “Those who cannot remember the past are condemned to repeat it”

                And here is the kicker. This forest products may be aligned to repeat the feat a mere year later.

                For about eight weeks, one of the issues discussed in the Pallet Profile Weekly has been how many conditions in the West mirrored those of a year ago. Conversations with western sawmills consistently denied that offshore markets could even think of traveling down that same path. Until  very near to our press time when China stepped into the western industrial softwood in a very big way.

                This might or might not yield the same result as a year ago. For my take, it has scary written all over it. Either way, it is an aspect of the market that bears watching regardless of where you are.

                (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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