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Pace Picks Up in Hardwood Region, West Coast Market
Market Update - Pace Picks Up in Hardwood Region, West Coast Market
By Jeff McBee
Date Posted: 12/1/1999
Low-grade hardwood availability remains strong throughout most of the U.S. There are a few areas that could be considered exceptions. We have received reports of spot shortages where pallet manufacturers looking to build winter inventory have not seen material come in as quickly as they would like. This is strictly market related. The areas in question have not had any adverse weather conditions that would cause shortages.
Log supplies are a growing concern in many areas east of the Rockies. Some of this is weather related, but market forces impacting loggers and sawmills are more often the cause.
Cash-flow problems are becoming an annual hurdle for many mills. Increased stumpage costs and larger receivable files make it more difficult to lay in winter log inventories.
The number of independent loggers dwindled over the summer due to the abundance of material that flooded most industrial markets. This has many hardwood sawmills anxious over potential log problems going into winter. There are no real shortages, but log supplies are low enough going into winter to cause concern.
Pulp and paper companies along the Eastern Seaboard have become aggressive in wood procurement as a result of weather problems related to hurricanes.
Rail tie markets continue to be lackluster despite rumors to the contrary. Most other industrial wood users are going strong. Flooring markets remain strong; flooring mills are once again taking material on a consistent basis — unlike earlier in the year, when sawmill production had out-stripped strong flooring demand. Framestock, board road and blocking are all providing solid activity.
Pallet manufacturers are encountering steady prices on raw material. Some areas still have large enough surpluses that lumber buyers say they could push prices even lower if they wanted to, but they feel this would be counter-productive.
Pallet demand has begun to pull out of the hot-and-cold demand cycle. This was facilitated by the traditional seasonal up-swing in pallet demand. Many contacts were concerned over how late the increased demand arrived but are relieved nonetheless.
Along with the improved activity have come other problems, not the least of which is labor. Labor is a growing problem for the pallet industry and there seems to be no relief in sight. Another problem posed by the improved activity is that additional business has come at the expense of little or no lead times. Some contacts say their lead times are mere hours, and they long for the days when a three-week order file was common. Short lead times can destroy production efficiency and ultimately wreck the bottom line. Cutting, nailing and delivery schedules all are impacted, and the lack of labor intensifies these problems.
Pallet prices remain steady in almost all areas. Some contacts report that they need to increase prices because of inefficiencies created by last-minute orders.
The softwood grade market on the West Coast remains cautiously quiet. Government figures indicate the housing market has slipped somewhat but still remains strong. Existing home sales and housing starts slipped, but neither was a surprise.
Low-grade material is slow to move in most cases. Mills and traders report better activity but not in standard lengths or cuts. The improving activity seems to be confined to odd-ball items and short length material in both economy and well priced utility stock. One wholesaler made the observation that the best activity was generated by going to mills, finding the material that was the "rock in their shoe," and moving it to pallet lumber buyers at an attractive price.
The quota continues to restrict random length economy from crossing the border. Material with quota allotments is selling for as much as $100 higher than material without quota in Canada.
The availability or random length economy 2x4 remains stronger than demand, with prices holding relatively stable. Mills with reputations for quality have been able to command premiums for their product, but even this side of the market has decayed. The surplus of short length economy 2x4 is suddenly bordering on becoming a glut. Prices range widely, but even the cheapest of prices does not seem to be able to move the volume of short length material.
Random length 2x6 has been in short supply recently and prices for economy 2x6 are fairly firm, reflecting the limited availability. The shortage of 2x6 has also been a factor in the pre-cut market.
Utility 1x6 is readily available from Canada, and in order to by-pass quota regulations, cut stock is sold in pallet kits. This has helped to keep cut stock demand steady. Some of the larger cut stock players are not offering the aggressive price cuts that have been typical on the West Coast recently.
Activity in industrial markets resumed solid levels on the West Coast. Agribusiness activity in the Northwest has provided better pallet demand in this area. Most of the central California agribusiness activity has tapered off. Southern California agribusiness is still a few weeks away for those serving this sector.
Pallet prices in the West are stable. Volume accounts are reportedly very competitive. Contacts report that existing business is providing respectable margins, but margins on bids for new business are quite thin.
Used pallet core supplies have been thin for several years for most pallet recyclers. The most pronounced problems are on the West Coast, where core shortages have reached critical levels for many. There are some reports of a mild easing of the problems, but contacts report that they are far from being out of the woods.
Recent changes in Wal-Mart’s pallet program is having a direct impact — even for those who do not service Wal-Mart distribution centers. Contacts report that when Chep assumes control of the pallet program at a Wal-Mart distribution center in their area, there is an immediate infusion of blue pallets that flushes white pallets out of their system. For recyclers that contract with Chep, the volume reportedly is all that they can handle; these recyclers instantly stop buying pallets off the street. Since recyclers servicing Wal-Mart distribution centers usually are the larger players in their market, this greatly reduces the demands on incoming core supplies.
This flushing of white pallets is a temporary, one-shot phenomenon; contacts anticipate supplies will tighten after the surpluses are digested. Contacts in areas outside of the impact of Wal-Mart distribution centers or where Wal-Mart has not yet changed to Chep report that cores still are tight. However, even in these areas, core supplies are better than they were a month ago. The lone exception would be the West Coast, where many recyclers report core availability is critical.
Recycled pallet demand has been solid to strong all year. Demand recently has improved remarkably; this sort of demand makes for frantic efforts to keep up. Contacts often report that things are so hectic that they have not been able to keep any GMAs on the ground, ready to go.
Labor problems continue to be an obstacle, and it is getting worse. Market surveys reveal more contacts reporting labor problems. The labor shortage has lasted over two years for many in the pallet industry. The fact that it is prompting more conversation speaks volumes about how acute the problem is. Typical wages and the physical nature of pallet recycling magnify general labor problems. Contacts have reported not being able to take all the business that comes their way because of the labor shortage.
Prices paid for cores generally are stable in most areas. There have been minor movements in acquisition costs in both directions. Some contacts report having reduced their offering price for cores back to previous levels after the higher prices being paid did not change the volume or quality of incoming cores.
The condition of the pool of available pallets and quality issues remain at the forefront of concerns of the pallet recycling community. Contacts continue to report a high percentage of #2 GMAs in their incoming pallet cores.
Many of our pallet recycling contacts report that demand for recycled pallets continues to slant towards #2s. This trend has been evident for most of the year. Price and availability are governing many pallet buying decisions. Some recyclers have opted to steer customers according to the shift in their incoming core mix.
Pallet prices remain solid in the recycled pallet market. In some areas prices for #2 pallets have increased. Prices on #1 pallets have not moved even though supplies have been — and remain — tight and demand has been solid to strong all year.
(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 (804) 740-1567 and ask for Jeff.)