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Hardwood Market Shows Signs of Life
By Jeff McBee
Date Posted: 4/1/2002
Hardwood Pallet Market
The pallet market began to show signs of life in early February and continued through early March. Pallet demand began to pick up slightly. Increases were minimal, but there were indications that the market was beginning to turn.
Requests for quotations and inquiries increased dramatically. Pallet suppliers reported the phone activity was way too much merely to be customers shopping to make sure they have a good price.
Despite the recent improvements, pallet demand continues to lag behind seasonal expectations. Nevertheless, with the recent gains, demand is better than the same time last year. The wave of quote requests and inquiries is fueling optimism in many areas.
The hot-and-cold demand pattern still prevails. This trend is likely to continue until the economy displays some growth. Lead times are short and getting shorter.
Downsizing inventories has shifted last-minute orders from an occasional occurrence to commonplace. The lack of advance notice exacerbates the problems caused by the hot-and-cold demand.
Pallet prices have endured gradual downward pressure for months as a result of the sluggish economy. GMA pallet prices held surprisingly steady, considering market conditions. Non-GMA pallet prices, on the other hand, have been unusually competitive. The price pressure in the non-48x40 market has been intensified by Internet auctions that have become popular with large companies. Low bids in Internet auctions that we have been privy to have been irresponsible at best. Pallet suppliers are rightfully concerned with this unhealthy trend.
Cash flow has suffered at the expense of growing receivables files due to slow-paying customers.
Raw material supplies east of the Rockies have been solid if not strong. The biggest concern about raw material is the economic health of sawmills.
Industrial hardwood markets have been apathetic. Framestock timbers and blocking have provided little if any activity. Rail ties have provided stronger activity lately. Cross ties have provided strong activity while switch tie activity has been moderate. Unfortunately for sawmills, the lack of activity in other industrial markets has many mills focusing on rail ties. This has kept tie prices depressed despite the stronger demand.
Western Pallet Market
Pricing and activity in the softwood grade market moved up in the first quarter. This is not too unusual for the time of year. Last year the market was over-produced and never had the strong rally that is typical in the spring. Pricing had leveled off by early March as the market digested the recent increases.
The futures market has been erratic but bullish. Lumber futures traded at a $25 to $30 premium to cash. The futures market turned down in early March, surrendering most of the premium to cash. Trade volumes were very light. This could be the market digesting the recent increases or an indication that the market is close to peaking.
The economy market encountered upward pressure as a result of higher prices in the grade market. Quoted prices were higher, but most of the material that moved traded at fairly steady levels.
Activity in the economy market improved during the quarter. Despite little downside risk in the market, the lack of solid pallet demand left lumber buyers comfortable with current inventory levels. So despite the market’s bullish posture, many lumber buyers continued to maintain their off-the-market position. Some companies quietly stepped into the market, buying wood to bolster inventory.
Utility material was readily available at affordable prices for pallet manufacturing. As the grade market began to heat up, the affordable utility began to disappear. There was still some affordable stock available, but most of it was short stock. The lack of utility tightened supplies in the economy market. When the grade market was down, the availability of utility weakened the demand for economy material, making the surplus seem even larger. As soon as the utility supply tightened, so did economy.
Quality quickly became an issue with less utility on the market. Prices on the junkier stock were well below established market levels.
Short material and trims are becoming a larger part of the market. The short stock is usually not a good fit in the pallet market. Green short material prices were inactive. Even random length offerings with tallies that are heavy to short have become a difficult sell.
Demand for dry economy material out-paced activity in the green fir economy market. This is mainly due to the natural fit of heat-treated material and dry lumber producers.
The cut stock market has been more unpredictable and a tougher business climate. Raw material pricing in Canada ran sharply higher for several weeks before stalling. Cut stock prices pressed higher in response. The ensuing activity was very slow, and some cut stock suppliers trimmed their prices in search of activity.
The alder market was edging up. Log supplies are expectedly thin this time of year, and this year is no exception. A major producer pushed prices higher, driving averages up. The rest of the alder suppliers had not moved prices.
Pallet demand in the West has been improving but remains well below seasonal expectations.
Pallet prices began to entertain a soft posture due to competitive pressure. This is ironic considering the upward pressure in raw material costs.
Recycled Pallet Market
Recycled pallet demand has been erratic for several months. March brought a new trend to the West that is not as evident in the East. In the West, pallet demand is strong for the large players while smaller recyclers are not enjoying the same up-tick in demand. The overall feel of the market is upbeat regardless of region. Improvements have been slow to develop and activity levels have not improved quickly enough to alleviate the glut of cores from the market that has been prominent since the economy began to slow 18 months ago.
The over-supply of cores has lingered long enough to force reductions on prices paid for cores. Core prices have fallen in most areas. This is the first time that core costs have retreated in quite some time. It is the first time ever for many recyclers. Many recyclers have been forced to cut off inbound supplies from street sweepers. This has intensified the core problem, forcing core acquisition costs down.
Distribution centers and other supply sources have readily accepted the lower numbers in most cases. In the past, recyclers that have attempted to reduce core prices often relented when they met resistance; they did not want to upset supply sources. Now, acceptance of the lower numbers is a clear indication of how large the current surplus is.
Recycled pallet prices withered under the pressure of the glut of cores and the sluggish activity. Some markets encountered price concessions on #1s as large as 50 cents. Price concessions for #2s have been even larger.
Despite the downward price pressure in core prices and pallet prices, there are some encouraging developments. Some companies report their best sales activity in the past two years. Still, the overall tempo of the entire market will have to pick up dramatically to eliminate the over-supply.
(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 (800) 805-0263 and ask for Jeff.)