Pallet Demand May Be Better — But No Great Shakes
Quarterly Update on Pallet Market
By Jeff McBee
Date Posted: 8/31/2001
Hardwood Pallet Market
The forest products industry is suffering through a tough summer. Hardwood markets have been soft for both industrial and grade material. Industrial hardwood markets have not been healthy all year. Industrial hardwood demand has been mixed all year, with some markets enjoying solid activity and others having come to a standstill.
The rail tie market has been oversupplied despite solid demand. The surplus in the tie market has more to do with robust supply than a lack of demand. All industrial markets are oversupplied, good demand or not. Flooring is one of the other industrial items enjoying good activity. Markets that are slow include blocking for steel mills, board road/ matting and framestock. As each of the slow markets became flush with material, sawmills turned their attention to industrial markets that were accepting material. It doesn’t take long for all the markets to become oversupplied once this cycle starts.
Prices for pallet material have leveled after months of decline in most areas. Markets in many areas are still maintaining a soft posture. Market forces have helped to stabilize prices in many areas. Mills took longer than normal shutdown periods for July Fourth and some shut down due to poor market conditions. This caused some correction in supply, but not in price.
Weather in Tennessee, Kentucky and the Southeast has become a factor slowing logging and bringing some supply side correction also.
Pallet demand remains on a slow track to recovery. Pallet suppliers have been reporting improvements since late February, but the improvements are coming in small increments, leaving pallet demand below seasonal expectations.
Most pallet demand has been of the last-minute variety. This has brought on an intense wave of hot-and-cold activity. Last minute orders and the incredibly short lead times that result are a common problem for the pallet industry. Pallet manufacturers can’t afford to turn away business, even when the short lead time makes the order less profitable.
Pallet suppliers are reporting trouble with receivables, also. Customers are stretching invoices as far as 45 days and in some cases 60 days.
Western Pallet Market
The softwood market completed the roller-coaster-like ride during July when softwood prices fell nearly as fast as their meteoric rise in April and May. The most dramatic effect was felt in the industrial side of the softwood market.
Prices for economy, utility and #3 all fell. Utility and #3 posted larger losses than economy but all industrial items were affected. Trading levels of lumber futures on the Chicago Mercantile Exchange became light and erratic. The futures market went through weeks of trading up limit followed by weeks of trading down limit. The moves were indicative of the uncertainty in the market pending the ruling in the countervailing duty case.
When raw material prices began to move upward earlier in the year, pallet manufacturers’ inventory levels were generally heavy. Most lumber buyers were taking modest volumes of wood over an extended period of time. Pallet lumber buyers did their best to stay off-market in an effort to resist the higher prices. Many began buying higher priced material in defense of the possibility of a long sustained market run. Inventories were thin at best when the market began to retreat.
Economy lumber supplies were bolstered by the availability of utility at prices suitable to pallet manufacturers’ liking. The volume of economy material was not sufficient to suppress the market, neither was the volume of utility. However, when the utility prices dropped within reach for pallet manufacturers, the demand for economy was depleted, leaving both utility and economy oversupplied.
Utility material has become the material of choice for the pallet industry. The higher quality and higher yield of utility offerings make these products attractive from a cost standpoint.
Cut stock demand faded almost as quickly as the price of random length material, pushing cut stock prices lower. This left cut stock suppliers struggling to find enough of a price spread to make money. Despite the tough conditions, some suppliers curiously became aggressive and pushed prices even lower. Contacts speculated that the tactic was from companies in dire need of cash flow.
Pallet demand has been slowly recovering. The strongest activity has been in the Northwest, particularly in the recycled market. California markets are erratic with more strength in the northern part of the state. Agribusiness accounts have been one of the few bright spots in the western pallet market. Consumer goods accounts have provided modest activity. Activity from heavy industrial and construction related accounts has been solid.
Pallet prices have been stable in the West.
Recycled Pallet Market
Recycled pallet demand has been erratic all year. East of the Rockies, recycled pallet demand has been less than spectacular but steady. Contacts report that "comfortably busy" has become too comfortable.
Core supplies did shift slightly only to revert to the pattern established earlier in the year. Some pallet recyclers were able to trim bulging inventories, but core supplies remain abundant.
The hot and cold pallet demand trend that new pallet manufacturers have been dealing with in recent years has become problematic in the recycled market. Recyclers report that reworking delivery schedules is the largest problem presented by last minute orders.
Core acquisition costs remain steady. There has been some upward pressure in markets with Wal-Mart DC’s. Core prices have leveled in other markets.
Competitive prices are common in the recycled pallet market. Prices are relatively stable, but continue to endure competitive pressure.
The recycled pallet market in the west has once again begun to heat up. Demand for #2 GMA’s has been stronger than the market can bear in some areas. Demand for #1’s has been steady but not as strong as #2 demand. Demand for premium #1’s or warehouse grade #1’s is outpacing supply as well.
Recycled pallet prices are steady in the west and are currently not enduring the upward pressure seen east of the Rockies.
(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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