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Market Update: Strong Log Supplies Don’t Bolster Availability of Hardwood Pallet Material
A look at the hardwood pallet market east of the Rockies.
By Jeff McBee
Date Posted: 11/1/2012
The most impactful factors in today’s market are economic. Log availability has been strong, but tying up the capital in carrying a large inventory is not a sure thing in the current economy.
Hardwood mills typically have good log supplies in nearly every region. Mills that are working with light log decks have done so intentionally– either due to financial restraints or by financial choice – to preserve cash.
Log supplies are quite strong in many areas due to the cooperative weather of summer. Strong log supplies don’t necessarily translate into strong low-grade hardwood supplies.
Despite these trends, there are a few pockets where log decks have shrunk. In some cases, mills have slowed inbound log receipts in an effort to work through older portions of log decks. A larger factor has been paper companies, who have become quite aggressive in several areas. There are some instances where paper companies are instructing their loggers not to sort for grade. This has resulted in grade logs as large as 27 inches going into the chipper to feed the digester. Normally this would have a bigger market impact, but current log decks make it only an interesting conversation point.
Although not an immediate problem, the dwindling number of loggers serving the industry is becoming an increasingly looming concern.
The lack of loggers and the lack of trucks are issues that are frequently mentioned across all regions for hardwood and softwood. Contacts along the Gulf region have mentioned that local truckers and loggers have been lost to gas/oil exploration and pipeline work. The larger money from these industries attracts excavating equipment and trucks.
The economic issues are a bit of a Rubik’s Cube of difficulties for industries working with low-grade hardwood. Finances have become a progressively more significant part of the landscape for everyone in the forest products community from logs through all of the secondary lumber processors along the raw material supply chain.
This has created some uncertainty at the mill level that is affecting production levels adversely in a number of areas. Many mills have leaned heavily on industrial hardwood markets as a survival strategy through the deep economic trough.
Low-grade hardwood availability east of the Rockies is solid in most areas but not particularly strong in any. Current availability of low-grade hardwood is easily sufficient for current business levels in most markets. The pullback in sawmill production has been substantial enough in some areas to impact regional supplies. This trend began as a few isolated incidents, but it seems to be spreading to more areas. The modest tightening has not caused any real problems yet. Apprehension levels have risen in a few areas as some pallet lumber buyers report that their inventory levels have lost ground lately. This is eerily similar to conditions in late in 2009 that later became an outright shortage that drove a spike in low-grade hardwood prices in 2010.
What is most concerning about current low-grade hardwood availability trends is that weather was a non-factor all summer in most areas.
While the trend is not universal, it certainly bears watching. Some regions have solid-to-strong supplies, while other areas are dealing with somewhat tight supplies. The areas with tight supplies report that lower production due to sawmills approaching the market cautiously is at the heart of lackluster supplies.
The largest concern is that at a time of year that many in the industry are looking to lay in inventory for winter, supplies can be hit-and-miss and the lack of surplus in the current market has buyers somewhat concerned. Current concerns are not about today’s availability but are more centered on down-the-road availability.
Markets that compete with the pallet industry for low-grade hardwood have been mixed. Some have slowed, which has helped to keep supplies of pallet material from tightening further. The rail tie industry continues to provide sawmills with solid to robust demand. Board road demand has pulled back slightly while crane and dragline mat demand have held steady. Demand in this sector – while steady - isn’t as strong as it was earlier in the year. Flooring demand increased consistently all summer. There are some flooring companies that are reaching up for higher grade material to meet demand. Oddly, the flooring industry has not raised its offering price to bring in more material.
By the time you read this, the election will have been settled. I hope your candidate won. Getting past the election will likely be a very good thing for pallet demand.
The overall feel of the market is that the pallet using community has been holding back any purchases that aren’t absolutely necessary and are keeping all inventory levels as functionally low as possible.
Pallet suppliers are speculating that the looming election was playing a role in a sudden sluggishness in the pallet market.
Pallet demand has been very uneven all summer. Overall activity began losing steam early in July. Not everyone experienced a slowdown that early, but the market grew progressively slower as the summer unfolded. Pallet demand became a central focal point of many market research conversations.
The downturn began with signs of the market losing urgency but pallet suppliers began describing activity as having “hit the wall,” or reporting that business as “downright slow.”
For many pallet suppliers, the slowdown was an across the board factor. In other cases, it was an end to seasonal demand, which abruptly ended rather than the usual coasting to a stop. One pallet manufacturer reported that his September numbers were off by over 40% from 2011.
There are some market exceptions where pallet suppliers remain busy, but even they are reporting a slightly more relaxed pace than what they encountered earlier in the year.
Overall pallet demand is best described as steady at levels that have fallen behind modest expectations. The overall feel of the market is mixed, but nearly everyone is reporting slower activity. Activity levels can vary greatly, even within small geographic regions. For some pallet suppliers, demand didn’t begin to taper until very recently.
Plant capacity utilization numbers have shifted very little and are mainly steady. There is a caveat however; the market is doing more with fewer people. So, although capacity hasn’t really shifted, the current workload is being done with less manpower. Capacity numbers would be off if the industry were working with a full workforce.
Pallet prices have been steady overall. Many pallet manufacturers feel that they are working too cheaply. Virtually everyone in the industry contends that margins are too thin considering existing costs to leave current prices in place.
Earlier in the summer, there were widespread efforts to push pallet prices upward. Contacts reported mixed success, with every increase being a challenge. The overcapacity in the market made such attempts to push pallet prices higher a difficult task.
The decelerating activity levels and the market’s temperament changed the market’s price posture and attempts at pushing pallet prices higher were largely put on hold.
(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.)