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Market Update: Asking for Directions at the Corner of Feast & Famine
Market analyst Jeff McBee explores the what ifs of the pallet market as winter months hit full swing.
By Jef McBee
Date Posted: 1/1/2011
A lot of lumber traders have a saying that goes something like, “There’s no market that the sawmills can’t outrun.”
That certainly seems the case at the moment for the hardwood market east of the Rockies. The grade market was surprisingly healthy this summer. Mills ramped up production. Their intention was to take advantage of solid-to-strong prices for grade that had been absent for a while.
At the beginning of the hustle and bustle, logs had been a challenge. The paper industry was on the rampage with bonuses and overall high prices. The high pulp prices climbed into the lap of saw-log prices. Loggers naturally take the path of least resistance and only sort for premium logs.
This has mills sawing a better than normal quality log. That worked quite well in a grade market that was heating up.
Where it didn’t work as well was in low-grade hardwood markets. There was less downfall to spread around. There was a good deal of irony in the fact that a lot of the grade activity was for export markets, while domestic markets were more tilted to industrial markets.
Seemingly every industrial hardwood market found better activity, and in some cases demand was white hot. Products that hadn’t been mentioned in years were in play. Framestock and mining timbers hadn’t been factors in the pallet market in several years, but they were suddenly stretching thin supplies thinner. The usual suspects also began to pull material away. Rail ties, switch ties, board-road, crane and dragline mats were in high demand. This was all hitting while flooring was heating up and paper companies were taxing fiber supplies in almost every region.
Summer rolled on and the grade market remained surprisingly solid. Hardwood production levels stayed up at good levels.
Weather provided few summer surprises and logging conditions improved. Then the paper companies surmised that they had more than enough pulp wood on hand.
This had an unusual impact. Usually when paper companies quit buying it brings relief to those competing for wood. Loggers have historically been able to continue working by supplying those other markets. That wasn’t the case this time.
There were a few select areas where loggers were able to stay busy. This was especially true in Alabama where grade mills were covered in logs. Alabama proved to be the exception and not the rule.
Cash proved to be an unexpected hurdle. In most areas, mills had survived winter by intentionally dealing with hand-to-mouth log inventories, often holding only two or three days worth of logs while sawing two to three days per week. Overall it had worked fairly well – at least for the mills.
The market shift had made logging capacity readily available. Mills in most areas were not interested in buying into a traditional winter log deck. After dealing with two years of deep recession, many companies in the forest products industry (not just mills) are stretched thin.
If you had looked into a crystal ball 30 months ago and had seen how deep the recession would cut, and could see how a lean industry would have to get much leaner and that same crystal ball showed you that the industry would survive while losing very few companies, you likely wouldn’t have believed it. But that is where we are now. Cash is tight. Money is cheap, but it is very hard to get. Credit is tight.
In typical forest products fashion, the market has taken a left turn that could not be expected. Here at press-time, the grade market has begun to cool. Mills are dialing back production. Overall the grade market has hit a lull where there are no species or cuts with any real strength and mills are talking about running two or three days a week again this year.
Where is the incentive for the mills to lay in a heavy winter inventory? It’s nowhere to be found.
So here we are. Thanksgiving is behind us. Hunting season is in full swing. Somewhere in this convoluted market there might have been an opportunity for the pallet industry to have better market conditions. If there was, I must have blinked and missed it. Winter weather is settling in and many conditions look a lot like they did this time last year.
A lot of “ifs” could change the market. If weather is cooperative… If paper companies don’t need to step into the market… If the housing market shows some strength… As it stands right now, the most likely scenario would seem to be a repeat of last winter.
The mixed blessing of it all is that the economy is slowly growing. 2011 should be better than 2010 in the same way that 2010 was better than 2009. It could be that pallet demand is likely to be slightly better than last year. So, if you can find the wood, you’ll be in better shape. But that is another if.
(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.)