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Market Update: Keeping an Eye Out for the End
Excess lumber inventory leads to pallet producers being able to buy higher grade material at a competitive price. Our market analyst wonders how long this trend will continue.
By Jeff McBee
Date Posted: 11/1/2009
††††††††††† I remember when I first started making market calls for the western market column. One of my contacts made it a regular habit to ask why we would comment on the softwood grade market.
††††††††††† His contention was that the grade market had little if any impact on the material that pallet lumber buyers were buying. My answer was always the same. Grade market trends impact production levels. Production of grade material in turn affects the amount of lower grade material available. His counter-reply was that it didnít matter because there was enough industrial softwood material to go around. We would always agree to disagree.
††††††††††† That was 1992. Back then, economy represented five to seven percent of a softwood millís production. Today, 17 years later, optimization equipment in the sawmill industry has reduced that number dramatically despite the fact that mills are often working with primarily smaller logs than they did then.
††††††††††† Now, in 2009, softwood mill production is close to historical lows. Couple that with the knowledge that such a very small percentage of a millís production becomes random length economy and the very thought of the combination would ordinarily send shivers down the spine of every pallet producer in the West.
††††††††††† It hasnít yet. The western pallet industry has comfortably survived all of 2009 under those exact conditions. There hasnít been any panic. There really hasnít been much apprehension. In fact, some pallet manufacturers have weighed the merits in tying up a lot of cash to hold a heavy inventory and decided that having cold hard cash on hand outweighed the risk of any potential raw material shortage or the possibility for a market jump due to any such shortage.
††††††††††† The western grade softwood marketís behavior has been quite a bit like a game of tug-of-war between limited production and limited demand. There have been reports that contracts with big box stores have kept production propped up slightly to achieve the current levels.
††††††††††† Each time that production levels fall, the market seems to adjust to the lowered production. The curtailed production briefly affects the marketís attitude.† Mill output drops, which results in some concern from buyers that the market will tighten and prices will climb. Each step of the cycle however results with production overpowering the very limited demand.
††††††††††† So despite production levels that are at the lowest levels in many years, the market has only shown brief signs of limited strength over the past several months.
††††††††††† The mainstream media seems to find good news about the housing market each week. The modest signs of improvement in the housing market are encouraging, but even if the current housing market doubled overnight it would still be a lackluster market by traditional measures. It is therefore clear that the housing market has a long climb to recovery.††
††††††††††† Growth in the housing market can snowball however as it creates jobs that help to fuel economic growth and a healthier economy helps to feed housing demand, completing the cycle.
††††††††††† †There is no doubt that the pallet industry and the overall economy could use a good- sized dose of even a partial recovery in the housing market.
††††††††††† Random length economy material had been tight for six to eight weeks right up until press time, when random length economy availability had begun to loosen.
††††††††††† Prices of economy stock had only risen modestly during even the tightest part of the availability cycle. The largest market factor that helped keep industrial softwood prices in check was pallet lumber buyersí ability to find utility and higher grades within their usable price ranges in the absence of sufficient supplies of economy.
††††††††††† The availability of standard & better material at levels affordable to the pallet industry is historically unheard of, with the exception of† the occasional spot load, or distressed stock. This year has been one long exception where the pallet industry has bought more utility and standard & better material than it has economy stock.
††††††††††† The trend shifted in late August and caused some trepidation, but as of press time, standard & better material was being offered to the pallet industry. Economy material prices had also begun to soften.
††††††††††† Itís very obvious that the absence of a solid housing market is the main factor making the higher quality stock affordable to the pallet industry. What isnít obvious is how long the trend will last. Eventually the softwood market will return to a semblance of its former state. When that might happen is anyoneís guess.
††††††††††† In the meantime, pallet manufacturers and their customers are being spoiled by the nicer stock. It could end with a rude awakeningÖ one day.
††††††††††† (Editorís 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.)