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Market Update: Reconciling Curious Government Numbers with the Recycled Pallet Market
Curious Numbers: Gross domestic product and other government numbers paint a confusing picture when contrasted with pallet market movements. Analyst, Jeff McBee makes sense of the numbers while explaining what to expect for the rest of 2014
By Jeff McBee
Date Posted: 9/1/2014
Pallet Market Update
Pallet market movements vs. government numbers. How to make sense of trends moving in different directions.
Sometimes the government tells us what we already knew about the market. Other times the government’s financial numbers explain things that seemingly make no sense. Such is the case with the odd goings on in the recycled pallet market.
Our Gross Domestic Product (GDP) for the first quarter of 2014 was a surprisingly weak -2.9%. The negative number was only a modest surprise for the pallet recycling community, which had seen chronically tight core supplies suddenly become sufficient to cover recycled pallet demand, which was good but nowhere as strong as earlier pallet demand.
The mystery in the market came as demand trended upward while core supplies began to tighten (in some cases significantly). When the government’s next GDP report was released, the numbers showed a surprisingly stout 4.0% growth. At first blush, the government’s numbers didn’t match what pallet providers were seeing on the ground. Why were the numbers not matching the market?
Digging deeper into the numbers reveals that 52% of the second quarter’s GDP growth was due to inventory building. That 52% figure unveils two interesting trends.
First, over half of the 4.0% GDP growth (2.08%) was speculative (dare I say hopeful) on the manufacturers’ part. This means that less than 2.0% (1.92%) was truly driven by current economic activity.
Secondly, that remaining 1.92% representing the economically driven portion of the growth did not offset the earlier -2.9% pullback. In light of these numbers, the trends in the recycled pallet market begin to make sense.
The anemically slow recovery continues to march on. Any growth in pallet demand is good, but the abrupt tightening of already tight core supplies didn’t match the prevailing trends until it was discovered that so much inventory building was occurring. As inventories rise, more pallets are stalled under load in warehouses and Distribution Centers (DCs).
The sudden shift in core supplies – in many cases – could be attributed to a lack of cores coming out of DCs, resulting in a dwindling core supply from those premium supply lines.
Pallet demand was exhibiting modest growth, with much of the activity dedicated to increases in inventories. Where do these trends point us going forward?
By the time you read this, the Labor Day holiday is behind us and manufacturers should be in high gear for the holiday season. This also means that Black Friday is merely ten weeks away.
Retail should be stronger and those swollen inventories should be correcting. This means that pallet demand should be better and hopefully core supplies will start improving.
There are some mixed trends that will affect the overall economy in general and the recycled pallet market specifically.
The good news is that despite a harsh low-grade hardwood shortage, the past twelve months have been the best year in recent memory for adding 48x40 pallets to the white-wood float. Unfortunately, some of that demand came from the recycled pallet demand not being able to keep up with demand in the second half of 2013. The most encouraging part of the trend is that the 48x40 pallets being infused into the white-wood float have been quality, heavy-duty units. Many times when pallet buyers are forced out of the recycled pallet market and into the new pallet market, they will opt for the lightest platform possible with the only goal being to get the load through the one trip. That was not the case this time as many pallet buyers found themselves buying a place in line in the new pallet market.
The new pallet market has its own set of curious numbers. Pallet manufacturers are seeing fairly strong demand, despite the lackluster economy. This trend is a little more easily explained. The economic downturn in 2007 that became a deep recessionary trough starting in 2008 eliminated more than a few pallet manufacturers. That thinning of the herd has led to stronger pallet demand for the companies that have survived.
The most concerning aspect of new pallet demand is the market’s raw material supply and continuing cost concerns. Despite large spikes in low-grade hardwood prices, hardwood pallets are still generally more affordable than a softwood pallet of comparable performance.
The low-grade hardwood market is facing ongoing challenges. Emerging industrial markets that are vying for the same low-grade hardwood mix as the pallet industry are booming. These industries – particularly oilfield products – are paying prices that the pallet industry does not have the means with which to compete.
If the housing market truly gets back to its feet the way prognosticators have predicted (wrongly) the past two years, then industrial lumber markets – both hardwood and softwood – will get stretched quite thin. But there are worse problems to have. Those that survived 2008 can attest to that.
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.