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Hardwood Supplies Tight at Wrong Time of Year
By Jeff McBee
Date Posted: 10/1/2002
Hardwood Pallet Market
Many pallet companies think of Labor Day as the time of year to assess inventory levels and decide when they need to begin building a winter inventory. This year, heading into October, the raw material supply has pallet lumber buyers concerned.
Log supplies are low for the time of year. Weather has been a factor in some areas. A lack of loggers has also been mentioned in areas throughout the Southeast. Thin margins in the forest products industry and the sluggish economy have hurt cash flow. Mills in some areas have been working with intentionally low log decks to preserve cash. Some contacts mentioned that fewer timber sales are another factor.
Tough markets have taken a toll on the sawmill industry, and the pallet community is feeling some of the impact. The economics of the poor markets have begun to impact raw material supplies, which have tightened in many areas east of the Rockies.
Conditions in the grade market created an unusual supply situation in the summer. Sawmills have been running limited production schedules, trying to tread water while enduring the tough market. Sawmill auctions are occurring at an alarming rate.
The low-grade segment of the hardwood market has provided better activity. Industrial markets have been surprisingly solid all year. Switchties, framestock and flooring have been solid markets, but the real bright spot has been the crosstie market. Solid demand has fueled bullish tie prices since mid-summer. Strong crosstie activity also has limited cant availability in some areas of the country.
Pallet demand displayed more strength over the summer than it has in quite some time. Even with the improved activity, though, pallet demand remains below normal seasonal expectations; however, pallet suppliers are hoping for some follow-through from the recent gains.
The slowly recovering economy has revived an old problem ó labor. Pallet companies that are experiencing solid pallet demand suddenly find themselves struggling with the manpower issue for the first time in a long while. Labor was a constant challenge in the late 90s and into 2000, but the labor shortage receded as the economy began to slip.
Compounding the problems generated by a tight labor market is the hot-and-cold nature of today's market. Last-minute orders have become a problematic but accepted fact of life. The over-capacity in the marketplace leaves many pallet suppliers little choice in dealing with unreasonable lead times.
Pallet prices have been more competitive than ever, and GMA prices have slipped in the past six months.
Western Pallet Market
The softwood grade market in the West entered the autumn slump slightly early, but the decline in prices was more gradual than the past several years. Grade offerings gave ground under consistent pressure of counter-offers. Mills hesitantly accepted counters while turning away requests for large concessions. The over-supply problems in the grade market appear to be more production related even considering the slightly sluggish grade market.
Lumber futures behaved oddly during the price slump. Trade volumes in the futures market were almost nonexistent. Prices on lumber futures contracts held a $20 premium to cash, which is unusual for the time of year.
Economy prices held surprisingly steady. Availability of random length economy improved gradually throughout the previous three months. Sales calls became more frequent during late August and early September. The pipeline appeared to be filling, albeit slowly.
Supplies of economy RL 2x6 have been tight most of the year, and there seems to be change on the horizon. Minimal demand for 2x6 in the grade market has made economy 2x6 downfall almost nonexistent.
Utility has become more of a factor in today's pallet market than ever before. There is evidence that a modest surplus of utility material is developing. This trend has resulted in some utility surfacing at prices within range of pallet manufacturers. In this affordable price range, short length utility is more available than random. When utility material becomes readily available at prices that are attractive for the pallet community, economy supplies loosen up, too.
Green economy material continues to be more plentiful than dry. Green stock has moved steadily mainly due to the more attractive prices. Desirable tallies for green material have been a complaint of lumber buyers, but it seems that desirable tallies are difficult to come by in any offering.
The cut stock market finished the summer in more upbeat fashion than earlier in the season. Agribusiness activity in California fueled solid demand that brought stability to the cut stock market. Prices settled in at levels established in late July after several rounds of aggressive cut-throat pricing earlier in the summer.
Expendable cut stock offerings reached borderline glut levels in August, and prices reached absurdly low levels. Some offerings were quoted as low as $80 per thousand mill with no takers.
Pallet demand in the West lately has been feast or famine. Some companies reported fairly solid to strong activity levels while others reported poor demand. The main factor apparently was winning or losing bids on large contracts.
Pallet prices remain very competitive throughout the West, especially in Southern California.
Recycled Pallet Market
The recycled pallet market displayed mixed signals recently. Demand for reconditioned pallets continues to improve steadily. Despite the improved demand, though, the economics of the recycled pallet market was in decline. Over-production has created quite a bit of downward pressure on recycled pallet prices, and prices for #1 GMA pallets have been slumping since early spring.
The most curious part of the current recycled pallet market is the core supply and core acquisition costs. Core supplies have been strong since the economy began to slip two years ago. In fact, core supplies have fluctuated very little, staying at levels that could easily be considered a glut.
The over-abundance of cores forced some modest concessions in core prices earlier in the year, although lower core prices often were isolated to small geographic areas. Core costs are currently steady. Despite the surplus, there appears to be some upward pressure on core prices.
Activity in the recycled market is sporadic. The upturn in activity east of the Rockies could no longer be considered hot-and-cold. Most companies are at least modestly busy. Some larger recyclers have enough increased demand to run overtime or are considering adding a shift.
The improved activity is partly seasonal, but contacts also report that their overall customer base is providing better activity.
The only area of soft demand in the recycled market is the Pacific Northwest, where demand is truly hot-and-cold and activity is split drastically between the haves and have-nots. Smaller recyclers find the market is frustratingly sluggish. Otherwise, demand in the recycled pallet market continues to outpace the new pallet market.
The demand balance between #1 GMA and #2 GMA has shifted lately. Demand for #1 pallets in most markets has been solid to strong, but the condition of the overall pool makes it more difficult to meet demand. The demand for #2 pallets has been sluggish in most areas, leaving supplies almost too robust.
(Editorís 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.)