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Demand Improving Slowly; Recycled Market Maturing
Market Update: by Jeff McBee - 'Demand Improving Slowly; Recycled Market Maturing'
By Jeff McBee
Date Posted: 6/1/2001
Hardwood Pallet Market
The western Gulf states have apparently survived the raw material crisis of 2001. They could have phoned in the Texas weather forecast throughout the winter: rain. The problem was not only volume but the number of rainy days.
By the time the weather began to dry out, everyone in the forest products industry was chomping at the bit, ready to go. So it didn’t take much dry weather to jump start the recovery process.
Raw material supplies in the area remain tight, but there is no longer the feeling of impending doom. The recovery process will take time before conditions are back to normal.
Industrial hardwood markets have been weak during the past quarter. Demand has been disappointing, to say the least. Surpluses began to swell as demand faded. The lackluster demand has also affected prices in most industrial hardwood markets.
The rail tie market has been one of the more over-supplied markets. Ironically, the surplus in the tie market is not so much the result of weak demand as it is robust supply. When other industrial markets began to falter, more mills began to cut ties, and the market was flush with ties in short order.
Framestock, flooring, board road, steel mill blocking and pallet material have all encountered soft demand and strong supply. The result has been bad news for sawmills.
Prices for pallet material registered precipitous drops in several areas. The Ohio River Valley north into western Pennsylvania and New York was the first region to experience the concessions. Some mills dropped cant prices by as much as $25 per thousand.
Other areas began to register price concessions shortly afterward. Northern Arkansas and southern Missouri along with the Southeast Seaboard have been experiencing falling low-grade hardwood prices.
In Arkansas and Missouri a large portion of the over-supply is related to the lack of activity in the steel industry. Small mills that make a living cutting primarily blocking for steel mills had few options when demand from steel mills went in the tank, and they began selling into the pallet industry. The over-supply started driving the prices down.
The over-supply in the Southeast is mainly due to weather; it has been too cooperative for the forest products industry’s own good.
Pallet demand began the year slowly. Many companies were reporting activity levels off as much as 25%. Demand began to improve near the end of February and has been slowly improving since. Most pallet manufacturers are reporting activity below seasonal expectations. There is quite a bit of hit-and-miss activity, and most current orders are last-minute. Given current conditions, pallet manufacturers welcome any business, but the volume of last-minute orders makes it impossible to run efficiently.
Pallet suppliers are reporting trouble with receivables, also. Customers are stretching invoices as far as 45 days and in some cases 60 days.
Western Pallet Market
The never ending downward drift of softwood prices finally came to an end in April. It ended with the lapse of the softwood lumber agreement. The funny thing is that the quota was intended to prop prices up stateside. Mills on both sides of the border had begun curtailments and shutdowns months ago, but the effect of these production curtailments wasn’t felt until the end of the quota. The expiration of the agreement allowed mills to clear the surpluses from their yards. Anticipating deals, buyers booked material, and this slight bit of additional demand was enough to upset the previous balance.
Prices for economy were affected, but changes in the upper grades were more pronounced. Prices on lumber futures went up as much as $50 within a two-week period but leveled off well below seasonal prices established over the past few years.
Opinions were divided on whether or not the bullish posture of the market would be sustained. Most contacts in the pallet community see the volume of production that is currently off line as a sign that the depressed softwood market has moved up slightly but not enough to bring many of the closed mills back or to bring curtailed mills back to capacity.
Pallet manufacturers’ inventory levels varied when the shift began. Some were holding large volumes of wood, having bought heavily when prices bottomed. Seeing little downside risk, lumber buyers jumped in. Others feel the latest price hike is a small bump and have opted to keep a more normal inventory, feeling that the market may go up, but they do not anticipate any wild swings.
Economy lumber supplies are tighter due to these latest developments. Lumber buyers still report being able to find what they need without much trouble. Prices are up slightly, but there are still deals for those willing to shop some.
Utility material had become the material of choice for the pallet industry but is no longer affordable by pallet manufacturing standards. The volume of random length utility that went into the pallet market over a 10-month period was unprecedented. The fact that pallet manufacturers were able to buy utility material in March is unheard of.
The cut stock market has been on a long tough ride due to the odd developments in the low-grade market. Near the end of the quota, concessions in economy prices squeezed cut stock suppliers’ margins in the U.S.
Another problem for cut stock suppliers is that pallet demand has been sluggish. Pallet manufacturers with cut-up lines and re-saw capabilities are more inclined to process their own stock when things are slow just to keep their employees busy.
Pallet demand is in a slow recovery mode but remains well below seasonal expectations. The farther north the market, the better the demand is. Southern California has begun to show signs of life in heavy industrial accounts, but other activity in the area is slow, and all accounts are competitive. Consumer goods and electronics are at the heart of the lethargic activity. Southern agribusiness markets are currently four to six weeks behind schedule.
Pallet prices remain stable in the West.
Recycled Pallet Market
The recycled pallet market has been unpredictable thus far this year. The odd behavior in the marketplace is due to unusual trends in both supply and demand.
Market conditions are like those typically associated with a maturing industry. These types of trends are nothing new to the pallet manufacturing community but have not been seen in the pallet recycling arena.
One of the more evident trends is overcapacity. This is something the market for new pallets has endured for several years, but it is a new twist in the recycled pallet market.
An industry maturing this quickly may seem odd to the casual observer. The sudden turn is not such a surprise when you consider the recycled pallet industry’s heavy reliance on the 48x40 market.
Core supplies became abundant during the second half of 2000, and the trend continued into 2001. Core availability began to shift in February. Pallet recyclers with heavy inventories were not as affected as smaller recyclers. Slower activity at distribution centers was largely responsible.
Economic conditions prompted distribution centers to cut inventories. This was a large part of the oversupply of cores. When demand improved, the backlash brought more pallets back into distribution centers. Therefore, more pallets were going in than coming out, totally reversing the supply trend.
Recycled pallet demand was sluggish but then began to improve in March. Demand has become hot-and-cold. Demand on the hot part of the cycle is almost too strong to keep up with. The other side of the cycle is slightly below normal for the time of year.
Recycled pallet prices took a small hit when demand faltered late in 2000 and core supplies were abundant. Recycled pallet prices were slowly eroding for a while.
Core acquisition costs remained at levels established when supplies were tight, but recycled pallet prices have been fading. This is squeezing profits out of the recycled pallet business.
The demand balance between #1 and #2 remains relatively unchanged.
(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, the only weekly report dedicated to serving the pallet industry. For information on subscribing to Pallet Profile Weekly, call (800) 805-0263 and ask for Jeff.)