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Market Update: Recycled Pallet Demand Makes Modest, Mixed Gains
Recycled pallet demand has been mixed. Most markets are seeing modest improvement from levels that were slower in the second half of 2006. The reported gains are mixed, depending on the region.
By Jeff McBee
Date Posted: 5/1/2007
Recycled Pallet Market
Pallet demand has tapered off from the strong demand of the first half of 2006 – in both the new and recycled pallet markets.
Recycled pallet demand has been mixed. Most markets are seeing modest improvement from levels that were slower in the second half of 2006. The reported gains are mixed, depending on the region. Most recyclers report activity is comfortably busy but little more. Overall demand is generally better than a month ago regardless of region.
Recycled pallet demand on the West Coast is a contrasting story; a mid-winter citrus freeze severely depressed pallet demand in some agribusiness markets.
The economy is fairly solid overall, but sectors that fuel demand in the pallet market are somewhat lethargic. Small swings in supply or demand in today’s recycled pallet market can make for dramatic swings in the marketplace.
This trend can be seen in some markets where the less than stellar demand is helping to improve previously weak core supplies. Core supplies are mainly tight outside these markets.
Core supplies have been tight for several years in nearly all markets. The economy is not as strong as it was last year, but it is strong enough that core supplies continue to be a constant challenge.
The trend of improving core supplies is welcome news in areas that have noticed it. Pallet recyclers have wrestled with core supplies that have been practically hand-to-mouth for several years.
The conditions that caused the tight core supplies over the past few years have had an impact on prices – in both acquisition costs and prices for finished goods. The combination of strong demand and tight supply has kept continual price pressure on both inbound cores – which is driving up costs – and this in turn exerts pressure on prices for outbound finished product, and they have continued to edge higher.
Recycled pallet prices have stabilized in most markets recently. A few regions continue to see both inbound and outbound pallet prices move higher, but they are in the minority.
The constant upward pressure on inbound cores and outbound finished goods has raised some concerns in the pallet recycling community. A number of contacts feel the trends have pushed prices of #1 GMA pallets too close to prices for new pallets.
The reasoning is that recycled pallet prices will level out due to proximity to new pallet prices. The concern centers on the potential for competition for raw material; it could force core prices to continue to press higher after prices for finished goods have leveled out, causing profit compression.
This is the third winter with no sign of the traditional post-holiday influx of pallets; this boost in incoming core supplies has not shown up for several years.
Slower demand has not helped solve any of the problems that go with working with hand-to-mouth supplies.
The main reason for the lack of change is that customers are placing more last-minute orders. This trend may have added more problems that recyclers hoped would be fixed by the more measured pace. In short, last-minute activity often creates more work and more challenges that make the lighter work load more hectic.
The supply-demand imbalance has moved closer together but still requires recyclers to turn inventory quickly; this has become a necessity in today’s market. It is easy to see how these trends make it difficult if not impossible to be efficient.
The deterioration of the available white wood pallet pool has been – and continues to be — a central concern for the pallet recycling industry. During the summer of 2006 the recycled pallet market was unable to keep pace with demand, and pallet manufacturers saw rising demand as a result of the shortage. The increased volume of new pallets has to help the overall quality of the available white wood pool, but no one expects a perceivable difference from a short flurry. In addition, the need to turn inventory faster has accelerated the circulation and the deterioration of the white wood pallet pool.
This contributes to a much smaller percentage of #1 GMAs in the overall white wood pallet pool. This creates shortages of #1 GMAs in markets with high demand for #1s, making yet another reason for hand-to-mouth turn-around cycles in the recycled pallet market.
The demand for #2 GMAs has been very strong; in fact, it has become the strength of the market in many areas. This trend was established when core supplies were much tighter and prices were on the rise.
This has caused tighter supplies, even in areas where #2 GMAs are not normally a strong demand item. The areas where #2 GMAs tend to be a strong demand item are working with very tight supplies.
This new trend occurred as customers moved from #1 GMAs to #2 GMAs, looking for temporary relief – in price, availability or both. After making the move, many customers never moved back to #1 GMAs because of the savings. Ironically, the core shortage is indirectly responsible for creating a 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.)