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Changes in the Hardwood Lumber Industry and Their Impacts on the Pallet Industry
Overview of the dramatic changes that have occurred in the hardwood industry, including analysis of recent data with an eye toward the future.
By Ed Brindley
Date Posted: 2/1/2010
The hardwood lumber industry has gone through very dramatic changes in the last 50 years, not the least of which is the evolution and growth of lumber used to construct new hardwood pallets. Hardwood sawmilling is a truly interesting entrepreneurial industry. Because so many different products are made from the same tree and trees vary so much, the sawmill industry is a split products industry. Many different products come out of the same raw material. By sawing different log qualities and species, a sawmill can influence its markets and product quality. This article analyzes a variety of markets, including pallets, some of their changes and how they have impacted the overall mix of hardwood products.
I have used several information sources to compile the analysis provided here. Our own Pallet Profile Weekly has provided a pallet perspective, Dr. Luppold of the Forest Service has written two papers and delivered power point presentations that incorporate the various hardwood product markets, and a recent issue of Hardwood Publishing Company’s Hardwood s Lumber Buyer is used as an information source. The graphs presented here typically go through 2008 because numbers for 2009 are only estimated at this time.
Historical & Recent Trends
Graph 1 shows how eastern hardwood production grew for fifty years with the exception of decreases during recessions and the decrease over the past ten years because of the flight of the furniture industry from the United States to the Pacific Rim. Production dropped over a billion bd.ft. in 2008. Notice the huge decrease of about 3.25 billion bd.ft. in the decade ending with 2008. Figures for 2009 are expected to show an even greater decrease.
Dr. Bill Luppold of the Forest Service estimates that we may have lost another 2 billion bd. ft. Some people think it is even worse. We really don’t know what 2009’s numbers last year will look like until they come out in June or later. All estimates project very large drops in hardwood production in 2009.
I have found that Dr. Bill Luppold of the Forest Service is one of the most reliable information sources on the hardwood market. He is a Ph.D. economist who understands the hardwood industry and has a good grasp on what is going on. The tables and graphs included here came from power points he used in 2009. Hardwood industry production estimates are typically not available until the middle part of the next year.
The different forest products industries are mostly composed of fairly small, entrepreneurial, family-run companies. Getting your arms around this kind of a population is difficult.
During a presentation made to the hardwood industry in 2009, Bill said, “We are in the worst market for hardwood products in North America since the great depression. We have permanently lost approximately 25% to 35% of our hardwood lumber production capacity in the last 18 months.”
Table 1 shows the change in hardwood lumber board footage output by the millions of board feet during four different periods from 1966 to 2008. About a 500 million bd.ft. decrease between 1966 and 1982 (the biggest recession since the great depression) was followed by a 3.35 billion bd.ft. increase and then a 1.1 billion bd.ft. increase. Between 1999 and 2008, however, production dropped over 3.3 billion bd.ft.
Until the recession in the middle of 2008, the decrease in production was primarily in grade hardwood because of the combination of lower housing starts and the movement of the furniture industry to the Pacific Rim. By the middle of 2008, low-grade hardwood products were the only positive element, particularly including pallets and crossties. Since then, however, the demand for even the lower grade hardwood products has gone down dramatically.
Table 2 shows the percentages of hardwood lumber that was consumed for both industrial and appearance applications every ten years from 1972 to today. Industrial markets, which include pallets and railroad crossties, tended to run in the upper 30% range for about 30 years, but they have surged to 60% today.
Last year Bill Luppold indicated that a number of states are “stinging” with production down 10-20%, including Texas, Missouri, Minnesota, New Hampshire, Vermont, Indiana, and Maryland. Texas and Missouri are states with significant low-grade markets for pallets, crossties, and board roads. States that are “hurting” (production down 25-30%) include Pennsylvania, New York, Louisiana, Virginia, Iowa, and Ohio. Those that Bill characterized as “really hurting” (down 35-40%) include Tennessee, Mississippi, Kentucky, North Carolina, Michigan, Maine, and West Virginia. States that are experiencing “real pain” with production down more than 45% are Alabama, Georgia, Wisconsin, Connecticut, and Massachusetts. Bill’s estimates might be a little different today, but the markets are undoubtedly still under pressure.
What Will Happen in the Future?
Some of the unusual things that have been experienced in hardwood markets include tie log prices being paid for higher grade sawlogs, unusually good looking crossties, some with FAS faces, reports of cherry being used to produce crossties, and shortages of residuals (chips, dust, bark, etc.). Some traditional users of residuals are now consuming roundwood.
What will happen when demand improves? Last year, Bill stated that if the demand slowly increases in the near future, we will see moderate increases in lumber prices because of significant inventories on hand. If demand increases more slowly, inventories are likely to be largely liquidated, and prices will then shoot up more quickly. Some of this is happening as I am writing.
Over the past few months, prices for higher grades of hardwood have improved some, but production has not responded very much. Many sawmills have cut back on production, and others have shut down. The sawmill industry has been reluctant to respond with any shifts in production related to the market. The industry lacks confidence in the future direction of both the hardwood markets and the overall economy.
Last year Bill said, “In the long term prices could increase substantially with increased demand because we have permanently lost approximately 25-35% of our production capacity in the last two years.” In a conversation we just had, Bill seems to feel just as strong if not stronger about the loss of hardwood sawmilling capacity today than he did last year.
Bill made a familiar observation concerning the loss of loggers. For years I have heard sawmillers and loggers say that more people are leaving logging and fewer young people are choosing it as a profession. The only saving grace has been an increase in mechanized logging machinery so that it takes fewer people to cut more trees. This trend is being complemented by the possibility that more loggers may be harvesting lower grade logs for biofuel markets in the future. Biofuel markets promise to be a growing part of the future. This will definitely impact timber supplies.
Sawmillers and pallet manufacturers are concerned about the economy. Some wonder if a double dip recession might be in our future. Many economists tell us that the worst is likely past and that the economy has started its slow growth curve back to a recovery. I continue to hear a mixture of positive and negative reports from people in the pallet business. It really all depends on your customer base.
For people who are concerned that a deeper recession might occur, a look at what happened to hardwood lumber production during the 1930s might be in order. Graph 2 shows that the peak hardwood production at the end of the 1990s is not the only time that hardwood production has been above ten billion bd.ft. Hardwood production in the neighborhood of eleven billion bd.ft. occurred early in the 1900s. By the early 1920s, production was down to less than six billion bd.ft. and it took a nose dive in the early 1930s to less than three billion bd.ft. So, in past history the hardwood sawmill industry has seen lumber production drop to less than 30% from a previous high point.
Everybody in the hardwood industry is aware that during the last twenty years or so many hardwood products have moved to China or the Pacific Rim. The flight started with furniture and then progressed to flooring, millwork, and more recently cabinets. The nature of most low-grade industries, such as pallets, crossties, and board roads, have kept these markets close to home. That is the reason that the hardwood sawmill industry shifted more toward low-grade markets. This recession caused shrinkage in the low-grade markets.
When the economy improves, low-grade markets are likely to regain more strength and become a more dominate player in domestic hardwood markets.
Remember when Japan was our dominant Asian manufacturing competitor? Now it is China, but China is seeing competition from Vietnam and some other Southeastern Asia countries.
There is increasing talk about some manufacturing moving back closer to the United States, most notably to Mexico and Central America. Higher fuel prices the past few years and concern about future fuel prices as well as some decrease in the manufacturing cost advantage in China are the driving forces behind this.
The nature of the pallet and container industries is going to keep production of these products fairly close to home for the foreseeable future. But we have to maintain a dependable supply of affordable lumber and a reliable labor force. As palletization grows in other parts of the world, the knowledge and experience of the North American pallet industry might play a bigger role in the future. It seems safe to say that pallet companies that expand their horizons beyond manufacturing and recycling to pallet management will be more likely to have a positive future in tomorrow’s pallet industry.
Market Research Sources
The following sources provide expert research and information on the hardwood and pallet lumber markets. Tapping into these resources is crucial in this time of uncertainty.
Pallet Profile Weekly
U.S. Forest Service
Dr. Bill Luppold
Hardwood Lumber Buyer
Hardwood Publishing Company, Inc.