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Market Update: Markets and Weather Provide Double Whammy on Log Supplies in the Upper Midwest
There are many factors that have contributed to the currently poor low grade hardwood supply scenario in the Upper Midwest. The two largest factors have been rain and market forces.
By Jeff McBee
Date Posted: 12/1/2007
Low grade hardwood supplies in the Upper Midwest may have turned the corner — or maybe not.
Raw material supplies east of the Rockies have turned out to be either solid or next-to-nothing. Unfortunately for the Upper Midwest, supplies have been the latter over the past eight weeks.
There are many factors that have contributed to the currently poor low grade hardwood supply scenario in the Upper Midwest. The two largest factors have been rain and market forces. In some cases it has been a double-whammy of both rain and market forces.
The problem began before wet weather was a concern. Grade markets have been lackluster all year. Sawmills then limited production in an effort to limit exposure to the eroding prices in the grade markets. Limited production brings limited cash flow. Some smaller, less capitalized mills and even some larger mills began to work with intentionally thin log decks. This strategy has been common in the sawmill industry over the past few years. Mills will run with smaller log decks in an attempt to preserve cash in any way possible.
Log prices have also been a factor. Some mills have begun to forfeit deposits on timber rights because logging and sawing at the bid price would lose more money than simply forfeiting the deposit.
In either case, log decks were low despite nearly ideal weather well into summer.
Then the weather turned uncooperative. Suddenly the strategy that had been working wonderfully was beginning to backfire in a big way.
Merely saying that weather became very wet is an understatement. Weather reduced minimal log decks down to critical levels throughout much of the region. This is especially true of the western portions of the region where log decks were hit or came very near to critical levels.
The suddenly too-close-for-comfort log situation presented problems on two fronts. The first was logs at grade mills — which was not as big a problem as the secondary issue.
The uncooperative weather had an even larger impact on low grade hardwood supplies due to the high concentration of large scragg operations in the area. Therefore the pallet industry in the area is feeling the pinch as much if not more than the rest of the hardwood market.
Raw material supplies are particularly challenging in Minnesota, Iowa, and Wisconsin.
This area of the country is not as heavily impacted by industries that compete with the pallet industry for low grade hardwood, but the competition is there nonetheless. Rail ties lead the list of competing industries that continue to provide strong market competition for low grade hardwood. Most sawmills find industrial hardwood markets to be very strong when measured side by side with the grade market.
Rail tie demand has been steady at very solid levels. There are some signs that tie treaters may have begun to back off slightly. Blocking and other timber type products have been strong as well.
Although the Upper Midwest is well removed from oil field areas, board road and crane matting have proven to be strong demand items due to high oil prices bolstering domestic oil markets and exploration. Demand in the Upper Midwest has been for material to go north to Alberta. The recent shift in the exchange rate between the U.S. and Canadian dollars makes the northern areas of dense hardwood territory a natural fit. This sector brings relatively big money for industrial hardwood compared to the rest of the market.
At press time, weather had been nearly ideal for two weeks, taking some of the urgency out of the log market. Contacts in the area are also comforted by quickly approaching cold weather — as a good freeze is ideal for winter logging.
That thought may be somewhat premature as parts of Michigan received as much as a foot of snow before a good freeze was in place.
Pallet demand is very sporadic in the Upper Midwest. Some companies are reporting very strong and even record pallet demand. Most contacts report solid steady demand that has slowed slightly over the past six weeks. Even the companies on the slower end of the activity spectrum report that their pallet demand isn’t bad; but activity is still perceptibly off from a month ago.
Pallet manufacturers serving primarily the construction and auto sectors understandably have slower demand levels.
Pallet prices in the area have been mainly steady despite some obvious pressure being exerted by the pallet purchasers.