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Market Update: High Oil Prices – The Pain That Keeps on Giving
Hardwood sawmill production is dropping fairly rapidly – an alarming trend considering the time of year. The impact of the housing slump and its effect on the hardwood grade market is driving down production.
By Jeff McBee
Date Posted: 7/1/2008
The Gulf Coast region has changed dramatically the past year. Some of the change may be temporary, but some of it appears to be quite permanent.
Hardwood sawmill production is dropping fairly rapidly – an alarming trend considering the time of year. The impact of the housing slump and its effect on the hardwood grade market is driving down production at a time of year when mills usually are ratcheting up their output.
No area of the country feels the impact more than the Gulf Coast region. It isn’t that mills in this area have taken more downtime or are running shorter production schedules. In fact, sawmill production in the Gulf Coast region may be higher than anywhere else in the country. That is the problem.
One of the few bright spots for hardwood sawmills has been demand from industrial hardwood users (that compete with the pallet industry for low-grade hardwood), including the continued solid, steady demand from the pallet industry.
It all began when oil prices moved dramatically higher a little over a year ago. The higher oil prices awakened domestic oil industry production and exploration. The more oil prices skyrocketed, the more the oil drilling increased.
This trend shift impacted low-grade hardwood markets in the Gulf Coast region far more than it did grade markets. Oil crews use board road and crane mats, which are made from low-grade hardwood. The increase in oil drilling activity spurred demand for board road and crane mats, which are in very high demand. Prices that were already steep headed higher.
The railtie market is another sector of the low-grade hardwood market that has been strong. Railties and switch ties have been substantially solid markets for several years. Railroad industry projections indicate there is some modest growth left, and railtie buyers have similar spending power as the domestic oil producers. The combined strong demand for board road, crane mats and railties has dominated low-grade hardwood markets so much that it is changing the very nature of the business serving them.
Small to intermediate mills in the Gulf Coast region have ceased sawing anything other than railties or timbers for crane mats. Some former pallet manufacturers have made similar shifts, focusing on board road and crane mats. Even some sawmills that once built pallets as part of their operations have focused entirely on board road or crane mats. In fact, there is so much emphasis on supplying these industrial hardwood products to the oil industry that regional gaps have arisen in pallet production. Board road and crane mats are bringing big money in a hot market, and the money is so good that it draws mills well outside their normal market areas.
Steel blocking is also an important part of the mix for hardwood mills in the Gulf Coast region. This sector is also enjoying unusual strength.
These trends all add up to stronger hardwood production levels that often do not benefit the pallet industry.
It is no surprise to see the pallet industry leaning heavily on sawmills that are more inclined to saw grade in order to avoid competing with these other industrial markets. However, the grade mills are gearing down production. A number of large scragg mill operations in the Gulf Coast region focus on pallets, but they are competing with mills that serve the railtie and domestic oil industries.
Any way you look at it, these factors are contributing to upward price pressure on raw material throughout the Gulf Coast region. Log prices are higher. Crane mat and board road prices are higher. Railtie and switch tie prices are higher. Cant and board prices have moved higher. Some of the upward pressure on raw material pricing is due to higher delivery costs, too.
Pallet demand in the region is solid to strong though not so steady. Petrochemical companies have provided hit-and-miss demand. Construction-related accounts are outperforming many other areas of the country but not so much as to drive strong demand.
Higher raw material prices have placed upward pressure on pallet prices. Higher delivery costs have also contributed to recent pallet price increases.
Some pallet price increases have been as much as 6%. Customer backlash has been minimal as most increases have been blamed on higher fuel prices.
(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.)