Markets in Transition: Business as Abnormal: Making Sense of World Pallet Market Projections
Pallet user expert, Rick LeBlanc explains the ramifications of global pallet growth, particularly the huge expansion predicted for Asia, notably China over the next few years.
By Rick LeBlanc
Date Posted: 6/1/2014
Earlier this year, the Freedonia Group, a research firm specializing in industrial markets, released a report on the global pallet market. The core message of the report was that despite the growing popularity of plastic, wooden pallets will still represent 90% of global $51.6 billion demand in 2017. Also, China will overtake North America as the largest regional pallet market.
The above projections may be good news overall for the pallet industry, but what does it mean, if anything, for individual businesses in the pallet community? Let’s start by summarizing the report.
Big Market and Big Numbers
According to Freedonia, the global sales of pallets are projected to climb 5% per year through 2017 to 5.1 billion units, a boost from the lethargic pace of the 2007-2012 period. Increased manufacturing activity will spark across-the-board gains, especially notable in large, mature markets such as North America and Western Europe. In terms of sales revenue, demand will increase 6.8% annually to $51.6 billion in 2017. Meanwhile, the amount of pallets in use will increase 4.6% per year to 9.9 billion in 2017. This increase is attributed to a larger global economy as well as the increased utilization of pallets in developing countries.
In terms of pallet material, Freedonia notes that the demand for plastic pallets will grow the fastest of any product type in most countries through 2017, stating the popular benefits espoused by plastic pallet vendors, such as that they are more easily cleaned for use in contamination-sensitive environments, tend to be extremely durable, and can be manufactured from recyclable material, making them attractive to corporate sustainability initiatives. However, Freedonia states, “because of their low cost, wooden pallets will continue to dominate product sales in most areas, representing more than nine-tenths of 2017 global unit demand.” (Perhaps indicative of the overall state of public perception with respect to wooden pallets, the report summary does not acknowledge the documented environmental benefits of wooden products as it does with plastic. Without saying as much, it reflects the mindset that wood is negative from an environmental perspective. This only goes to highlight work that needs to be done by the wood packaging community to assert the benefits of its products.
A key component of pallet market growth will take place in the rapidly industrializing Asia Pacific region, led by China. Freedonia notes that while increased manufacturing output will drive increased pallet usage, a shift in material handling systems towards palletized handling will also result in substantial gains in pallet usage. Today, pallet utilization is still relatively low in Asia relative to the size of manufacturing, warehousing and construction sectors in those markets. China is pegged to experience the strongest unit sales increases of any regional market, averaging 8.1% annually through 2017. At that time, it will account for one third of the global pallet total, overtaking North America as the largest regional market.
Does Big Count?
Over the years, it seems that when I talk to prospective entrants or investors to the pallet business, one of the first things they want to know about is the size of the market. Of course, no surprise to Pallet Enterprise readers, the pallet market is actually the coalescence of many different segments, and so it becomes useful to drill a little deeper to figure out what segment of the market they are looking to target, whether new or used, plastic or wood, closed loop management, industrial or consumer goods, etc.
At a macro level, the fact that analysts, such as Freedonia, project manufacturing growth for North America and Europe is generally good news. This means there will likely be more orders to go around. This is in line with other projections of strength in North American and European manufacturing, such as those offered by the National Association of Manufacturers. In such an environment, a couple of things come to mind. The first is that in a good economy there is less immediate threat of customer poaching. In an economic downturn there is a tendency to more aggressively scrutinize the customer base of the competition. The second thing to emphasize in a good economy is to remain diligent in cost controls. When the order file starts to build, it makes sense that you have to hire more people and generate more capacity. But it is always important to do so prudently and not leave yourself exposed to the next downturn.
Transition to Plastic?
The report suggests a continued higher growth rate for plastic pallets than for wood, given the reasons outlined above. But growth rates can mean little when you are talking about an overall small part of the market. Alternative materials are becoming more competitive from a price standpoint even though they still have a ways to go for some applications. Alternative pallet producers continue to work at ways to make pallets more competitively priced, either through using less material, or through substituting less expensive material in composite pallets. In spite of rising timber prices, the assumptions about market movement and share seem reasonable. Look for alternatives to grow, but the price differential is still large enough to keep wooden pallets the smart choice in many applications where securing the return of pallets is difficult to do.
Powerhouse China – Is Patent Infringement a Concern?
No surprise Asia Pacific in general, and especially China, is on everyone’s radar screen as the rapid growth market. Going through a massive industrialization process, Asian countries are growing their modern logistics infrastructure, and domestic pallet demand will be a big part of that transition.
With a pallet market that will surpass North America’s by 2017, there will continue to be demand for timber, equipment, management and technology. This is good news for providers of such pallet-related offerings. Many companies are already active in the Chinese market, including pallet and reusable packaging management software provider, iLogic.
Victor Chen, president of iLogic, noted that there is already an international presence in China, with lumber coming from the United States, Canada, New Zealand, Australia and other countries. Also, there is some pallet manufacturing equipment in China coming from locations including the United States, Taiwan and Europe. iLogic is known in the U.S. market for providing the management software used by 9BLOC.
One concern that some equipment manufacturers have expressed about entering the Chinese market is that of the threat of patent infringement. I asked Chen for his perspective on this issue.
“China is a very large country,” Chen commented, “and its business practices are far from homogeneous.” It can range from highly ethical and professional to shady and questionable. Business practices can vary according to type of industry or geographic regions. In terms of equipment, Chen observed that there does not appear to be an issue, however he would need more detail to comment about specifics.
So what is the takeaway for individual companies? North American producers can hope for a reasonably favorable market in the immediate future. This doesn’t mean that companies should be reckless in expanding too fast. Smart company leaders will maintain control and grow capacity without overextending themselves. For providers of related equipment and services, some may consider looking towards the booming Asia Pacific market as an opportunity for growth. As always, proceed with caution and look for the best allies.
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