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Market Update: Is Ohio River Valley Region Harbinger for Elsewhere?
The biggest factor in low-grade hardwood availability at the moment is unquestionably the hardwood grade market – or lack thereof
By S. Jeff McBee
Date Posted: 7/1/2007
The region of the Ohio River Valley, including most of West Virginia and most of Pennsylvania, has been somewhat of a market island. It is not that trends in this region are necessarily contradictory. In fact, often this region is a very good barometer of what is about to happen with low-grade hardwood supplies in the rest of the country. The exception, of course, is when weather becomes a dominant factor.
This market area is suddenly shifting, and therefore it bears a closer look. There are several reasons why this region can often project what may be on the horizon for other areas.
If you were trying to determine an epicenter for Northern grade markets, you would likely place it somewhere in this area. All of the large players in the grade market are involved in this region. So when the grade markets turn in this area, those involved with low-grade hardwood feel it – often faster than other areas of the country.
Another factor more directly related to those buying and selling low-grade hardwood in the area is the diversity of industrial markets that use low-grade hardwood. Low-grade lumber buyers in almost every area of the country have a regional nemesis competing for low-grade hardwood. This area of the country has more than its share of users of industrial hardwood vying for the supply of low-grade material.
This region has solid markets for steel blocking, mining timbers and flooring. Along with these industrial markets, the area contains one of the real hotbeds for railtie and switchtie activity.
So let’s take a look at the current status of this market. The biggest factor in low-grade hardwood availability at the moment is unquestionably the hardwood grade market – or lack thereof.
The weak hardwood grade market has hurt sawmill profitability in numerous ways. Since this area has a strong focus on grade, sawmills are finding it more and more difficult — if not impossible — to operate profitably. For sawmills trying to sell to the grade market, this has fostered an attitude of ‘Why bother?’
Log costs historically do not retreat as quickly as sawn product pricing. Many mills, therefore, are working through their lesser quality logs and reducing production in order to minimize losses. Many are running just to generate enough cash to cover necessary financial obligations but nothing more.
The production cuts are impacting availability in low-grade markets that depend on downfall from sawmills. Low-grade lumber buyers find less material on the market because of the reduced production levels.
An equally prominent factor in low-grade hardwood markets in this region is the previously mentioned industrial markets that compete for material. These industrial hardwood markets have been one of the few bright spots for sawmills. Mills are not only focusing on lower grade logs but are also targeting these users of industrial hardwood. Blocking for steel, mining timbers, flooring, framestock, railties and switchties have all provided solid to strong demand in a hardwood market that has been lethargic for upper grade items. These industries are easily able to outspend the pallet industry and more often than not are also willing. The prices being paid for these competing products often make pallet material an afterthought.
Pallet demand in this region has been very mixed. Some suppliers have witnessed a strong upturn in demand while others have experienced a drop in demand.
Pallet suppliers with slower demand levels nevertheless report steady demand at acceptable levels but would be happier with stronger levels. There has been additional activity due to some seasonal upturn but nothing dramatic. Those reporting stronger activity levels indicate their overall customer mix has been responsible for the better activity.
Construction-related accounts have provided some of the improved activity. One fairly prominent sector in the region, automotive OEM parts suppliers, has not been up to par, and this sector remains quiet. Contacts are not optimistic for a short-term recovery.
Pallet prices have been mainly steady in the region although some selected increases have been passed along. Some pallet suppliers in the region report that margins are way too thin to operate profitably with sound business decisions. Another factor applying pressure to pallet prices has been the re-emergence of surcharges for rapidly rising fuel costs.
(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.)