For over 30 years the leading pallet and sawmill magazine in America.
Market Update: Hardwood Supplies Take 1 Step Forward, 2 Steps Back
Low-grade hardwood supplies loosened during 2006, but the low-grade hardwood shortage is still in place and now is over three years old.
By Jeff McBee
Date Posted: 1/1/2007
Hardwood Pallet Market
Low-grade hardwood supplies loosened during 2006, but the low-grade hardwood shortage is still in place and now is over three years old. Supplies have not been as tight as they had been, but gains seem to come in one-step-forward, two-steps-back fashion. Just when it appears that the market begins to find a balance, another factor snatches away the potential reprieve.
Weather quickly became a factor in many areas east of the Rockies, and other market forces were sending a bevy of mixed signals.
The Ohio River Valley and a large portion of the Eastern Seaboard have been hit hard by wet weather. Supplies in the regions have tightened, triggering some upward pressure in low-grade hardwood pricing.
Grade markets have faltered again, but not log costs. The slow housing market has affected hardwood grade markets. Sawmills are forced to adapt, often running lower production levels because of the weak markets. The drop in the housing market has especially hurt red oak markets. Upper grade oak offerings have endured slow activity and, as a result, depressed prices. Many mills have taken a defensive posture and are running only enough to pay for minimal financial obligations and no more.
This is a difficult market for sawmills. The market bears many similarities to several years ago, when there seemed to be two sawmill auctions every week.
One of the tactics used to survive in those tough winters was to keep log decks intentionally thin in order to preserve cash. The tactic is once again being widely used for the first time in several years, but wet weather has caused it to backfire in some areas.
Mills focusing more on lower quality logs and higher paying industrial markets are outpacing production in markets such as railties, switch ties, board-road/crane-matting, steel blocking, mining timbers and framestock.
Low-grade hardwood pricing has remained mainly steady, but some areas have seen minor fluctuations.
Pallet demand did not finish the year as strongly as it began. Early November brought some sags in demand that raised concern, but by mid-December demand was up to or above seasonal expectations. Still, it is a considerable dip from the white-hot demand of mid-summer.
Pallet prices were largely steady but not because of a lack of effort from customers trying to drive down prices. Some contacts blamed the pressure on the demand sag, which left pallet purchasers with free time to try to cut costs.
Western Pallet Market
The disastrous softwood grade market in the West seemed to gain momentum as the fourth quarter progressed. Grade prices went into a free-fall in July, and by October the decline was beyond ugly.
Sawmills were able to endure the tough price slide by focusing on industrial softwood markets. Unfortunately for sellers, the price slide for industrial softwood was not far behind.
The price free-fall forced utility and even higher grade offerings into the pallet industry’s price range. Pallet manufacturers that never use upper grade material found prices so low and close to economy that they were using #3 material exclusively.
Economy material quickly began approaching glut levels. Even sellers began using the ‘g’ word. Lumber buyers found any tally and species as close as the phone. Economy softwood prices quickly reflected the abundant supply.
Economy 2x4 was scarce earlier in the year, creating a market where it was priced higher than economy 2x6. The price imbalance between the two disappeared as surpluses quickly made both dimensions equally oversupplied.
The pallet community has been dealing with less than favorable tallies in economy offerings for several years. The widespread use of optimizers has made short length material an increasingly dominant part of the industrial softwood market. The abundance of economy material on the market has encouraged mills to offer more balanced tallies. Pricing for short-length offerings was understandably weak.
The new softwood lumber agreement between the U.S. and Canada put a bounce in the step of pre-cut suppliers in Western Canada. Pallet kits are an exempt product, much like in the original quota system.
Pallet demand in the West went into the end-of-the-year quiet period. Contacts are content with current levels despite the fact that they are starkly weaker than earlier levels. This is because current levels are outpacing same month numbers from last year.
Pallet demand has exceeded expectations all year in the West.
Recycled Pallet Market
There have been some minor fluctuations in core supplies the past few months. The recent ebb and flow obviously is directly connected to recycled pallet demand. So, depending on whom you talk with, core supplies may or may not have improved.
Supply and demand have been out of balance for several years. The fairly healthy economy of the past several years has made core supplies continually problematic.
Pallet demand in general experienced some minor drawback during the fourth quarter. Both new and used pallet markets were affected. Activity for recyclers did slump as steeply as the new pallet market. Most recyclers already have seen some uptake from the lower levels, with many finishing the year strongly.
The shortage of available of cores that has lasted for several years is showing no signs of returning to any semblance of balance.
So, recycled pallet demand, although not as stout as earlier in the year, continues to exceed supply.
Prices on both inbound supply and outbound product in the recycled pallet market finished the year fairly steady. Recycled pallet demand, although not as strong as early summer, is solid. Even the slowest reported activity levels remain solid nonetheless. Most companies indicate they are at least comfortably busy. There are even stronger activity levels in some areas.
Despite the less hectic pace in some areas, demand has been close enough to full capacity to keep many of the market’s challenges in place.
The limited core supply and demand that outpaces it have changed the way recyclers do business. The conditions that have brought about an almost constant hand-to-mouth supply have created a market where turning inventory quickly is required to keep pace with demand.
Some recyclers who became weary of the frenzied hand-to-mouth pace of the market were hoping that the demand taper would bring some relief. No such luck.
One twist in demand that has kept the pace in the market frantic is the combination of short order files and shorter lead times. Plant capacity numbers have not reflected a slower pace. Customers were placing more last-minute orders. The end result is solid business levels, smaller order files, and even shorter lead times. So the relaxed demand didn’t result in a more relaxed pace. Sometimes it has created an even more hectic pace.
Core prices are mainly steady. Any improvement in core supplies has come at the expense of diminished demand and not stronger supply.
Prices for ready pallets remain steady. The higher core prices are keeping some modest upward pressure, but the overall feel of the recycled pallet market is one of steady pricing.
The declining condition of the available white wood pool remains a large concern. The high percentage of 48x40 pallets that are reused both from closed loop systems – whether private management or third-party leasing – along with pallet recycling have limited the number of new 48x40 cores going into the system, resulting in the deterioration of the white wood pool.
The declining quality of the overall white wood pallet pool has created a smaller percentage #1 GMAs in the pool. This increases the need for a hand-to-mouth turn-around cycle to satisfy demand for #1 GMAs.
Demand for #2 GMAs has been stronger than normal since the end of summer. This has taxed the supply of available #2 GMAs, leaving supplies of #2 GMAs unusually tight.
Availability of #1 GMAs has been tight enough that some customers have moved from #1 GMAs to #2 GMAs. In many cases the savings kept these customers from going back to #1 GMAs, which has created higher, long term demand for #2 GMAs.
(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.)