Backlash Has Arrived In Hardwood Market
Quarterly review of pallet and low grade lumber markets.
By Jeff McBee
Date Posted: 4/1/2003
Hardwood Pallet Market
The forest products industry has worked with thin inventories for several years. Contacts voiced concerns that the strategy was flawed and could backfire. The tactic paid dividends in tough hardwood markets with the help of several mild and dry winters. The backlash that contacts feared finally arrived this year. Inventory levels were thin heading into the fall -- as they had been for several years. The weather turned ugly early and has been troublesome ever since. Raw material supplies were just beginning to tighten when this column last appeared. That was before deer hunting season and the precipitation ó lots and lots of precipitation. First there was rain, and then the rain turned to snow in the North, and the South got more rain. Then storms bringing a wintry mix pushed as far south as Dallas. The forest products industry couldnít seem to get away from the weather.
Each passing week it seemed that conditions for raw material availability could not get any worse, but they did. The relentless precipitation created very poor logging conditions in the East.
Anxiety levels rose as the log decks declined; concern grew to borderline panic for many mills.
Sawmills in many areas were running limited schedules ó many only a few days per week because of the weather-related log shortages.
Every sector of the forest products industry has been affected. Log supplies are sparse throughout the Eastern half of the country. Inbound log supplies are well below demand levels.
Pulpwood prices have soared as paper companies aggressively raised prices for pulpwood. The trend started in the South but has become commonplace in Northern markets as well. Contacts have reported local paper companies running with three-day inventories. The stout pulpwood prices pressed low-grade log prices higher. The Southeast has been particularly affected; reported pulpwood prices have doubled in the region.
Industrial markets have been the strength of the hardwood market since autumn. Demand from these markets has been stronger than the supply of raw material. Railtie demand is as strong as it has been in several years, and flooring, framestock and blocking have provided solid demand. This combination has taxed availability in most hardwood markets while keeping pressure on prices.
To say that cant prices are bullish would be a tremendous understatement. Log prices have moved up dramatically. The lack of availability of low-grade hardwood has forced price competition for the product. Strong industrial markets ó which can afford to pay more for raw material than the pallet industry can ó are also a factor in a market that has become very volatile. Sawmills then move more wood away from the pallet market. The resulting quality of the wood that does fall to pallet producers suffers even though the upward price pressure remains.
The current raw material scenario is drawing numerous comparisons to 1992-1993. The common trend in the two shortages is the el Nino weather pattern that has brought weekly doses of precipitation east of the Rockies. Many contacts state that raw material availability is worse now than in the shortage 10 years ago.
The single biggest difference between then and now is pallet demand. New pallet demand was still growing at that time and was approaching historic highs. Pallet recycling, pooling and a softer economy have left new pallet demand at lower levels or else this year's shortage could have become an absolute catastrophe.
Pallet demand has been on the slow track to recovery for several months. The pace of the recovery is modest and will still take time. Orders for durable goods rose 3.3% in January, which is evidence of the trend. The January numbers were a surprise to economists, but it reveals an ongoing improvement in the U.S. manufacturing sector.
Hot-and-cold demand cycles are at their worst in several years. Pallet prices have begun to move in more consistent fashion. Pallet buyers who have become accustomed to placing last minute orders are now price shopping at the last minute, creating even more chaos. Dealing with the last minute orders, improved demand, tight raw material supplies and quote requests has made life hectic for pallet suppliers.
Pallet prices, which had been slow to react, have begun moving up. Pallet companies that were reluctant to raise pallet prices have given way to the survival instincts. Raw material prices have forced pallet companies to move pallet prices higher whether they want to or not.
Some customers have played musical chairs with vendors, but this has already proved to be a dangerous, expensive strategy. Some pallet users that left for lower prices returned to their original suppliers because they needed reliability.
Western Pallet Market
The softwood grade market in the West has endured one of the quieter late winter markets in recent memory. The market faded in late autumn as anticipated by traditional patterns. That was the last time the market followed the traditional grade market pattern.
The grade market has been buffeted by winter weather in the East that has hampered construction efforts, limiting demand for on-grade softwood.
The sluggish grade market kept utility and in some cases even higher grades of material within a usable price point for the pallet industry. The surplus in the industrial sector of the softwood market moved slowly. Availability of industrial material was strong throughout the West. Buyer apathy ran high as prices fell lower.
Prices hit a point where mills quit pursuing the market because they felt that the numbers could not go low enough to move industrial stock. Quoted prices remained steady and counters were openly solicited. Pallet lumber buyers were not yet ready to build inventory for their busy season. Some sellers have began to take positions in anticipation of better demand for pallet lumber.
Economy prices surrendered large concessions in October and November and have held a soft posture ever since. The gap between green and dry material closed during that time. Delivered dry prices have actually been lower in some markets due to the higher freight costs associated with green material.
Price spreads between dimensions closed to a more traditional range as well with much of the premium for 2x6 fading.
Canadian cut stock mills endured one of the worst winters in a long time. Many factors contributed to cut stock suppliers being forced to work with smaller margins during the marketís slow periods. Canadian cut stock suppliers have been fighting modest demand and higher random prices north of the border. The combination leaves very little room for profit margin. Prices for pre-cut in California markets were trending down at press time. This was a surprise twist in the market and bad news for suppliers who had worked hard to push through modest price increases in early February. The exchange rate has also been slipping as the Canadian dollar has strengthened against the American dollar, adding insult to injury.
Pallet demand in the West opened the year with stronger than expected activity, but that didnít last long. Pallet demand moved from slightly above modest seasonal expectations to downright slow in just a few short weeks. Pallet demand in Western markets still was slow as of press time. Heavy industrial accounts have provided the only respectable activity, but these are often the lowest margin accounts.
Pallet prices remained relatively stable in the West; even when lumber prices were falling, pallet prices were not. Pallet suppliers were forced to move prices due to increases in insurance, workman's comp rates and fuel surcharges.
Recycled Pallet Market
Core supplies in the recycled pallet market have increased over the past month as a result of the post holiday influx of cores. Supplies were solid to strong in most regions to begin with. This year's post holiday core flow has not been up to traditional levels but is heavier than the past two years.
Availability of #1 GMAs is static at fairly normal levels. Demand levels in the recycled market have tested core supplies in some markets, but the problems have subsided with the improved flow of cores. Raw material problems in the new pallet market have created additional demand in the recycled pallet market.
Market availability of #2 GMAs is similar. Most areas are running close to a balance of inbound and outbound pallets. The volume of #2 GMAs is strong enough in some areas to create a bit of an oversupply.
The Western market continues to be one of the move volatile areas in the recycled pallet arena. The abundance of #2 GMAs works well for the Western agribusiness market, but the central valley has provided little activity. Contacts say the market is running behind due to rain.
Core acquisition prices have not registered any significant changes recently. Prices paid for cores were flat in all areas.
Pallet demand in the recycled pallet market east of the Rockies remains more solid than in the new pallet market. Although demand opened the new year rather sluggishly, recyclers now report solid to strong demand in most areas.
A large portion of demand is last minute activity. Reacting on the fly is easier for recyclers than for new pallet suppliers, but the last minute orders still cause problems.
The demand balance between #1 GMAs and #2 GMAs has been static lately. There have not been any trend shifts in several months. This will likely change as seasonal demand begins to improve.
Prices of recycled pallets are keenly competitive. Prices are stable but under constant pressure.
(Editorís 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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