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Market Update - Rainy Weather Still Plagues Raw Material
Rainy weather leads to one of the tightest hardwood lumber markets on record. Complete update on the pallet and lumber markets around the country.
By Jeff McBee
Date Posted: 7/1/2003
Hardwood Pallet Market
Pallet demand in early March was the strongest seen in nearly three years. March 19, however, marked the start of Operation Iraqi Freedom and the end of pallet demand for the three weeks of heavy fighting in Iraq.
Pallet demand has once again begun to improve, but still leaves much to be desired.
The most recent economic news came as no surprise to the pallet industry. Orders for durable goods dropped in April; analysts expected the dip because of the Iraqi war.
There was good news, though. Retail sales improved the seventh straight week, and Gross Domestic Product figures revealed stronger than expected economic growth.
All signs indicate the pre war economic recovery was put on hold for the war but is now back and making slow gains.
Even with pallet demand that is less than stellar, some pallet suppliers are reporting strong activity. There are varying degrees of activity within regions, depending on customer base.
The improved activity has helped suppress — but not eliminate — some of the hot and cold demand trend. Last-minute orders are commonplace in today’s market.
Wet weather continues to plague raw material supplies east of the Rockies. Log supplies are unusually thin for this late in the year, and they are trending in the wrong direction. The Gulf States and Ohio River Valley regions are working with dangerously thin log decks.
Industrial hardwood demand continues to provide strong competition for low-grade hardwood. Railties, flooring, timbers and framestock are all strong competition for raw material.
Cant prices are steady to bullish in most areas. Ironically, wet weather has been a stabilizing factor. Most of the bidding wars have subsided because of the resolve that only dry weather will correct the supply.
Pallet prices have moved up the past few months. Pallet price increases have not come as quickly as the raw material increases, leaving margins dangerously thin in some markets.
Contacts report concern about the size of their receivables files. Even the best paying customers have been slow to pay or are dictating terms as absurd as net 60 days.
Western Pallet Market
The Western softwood grade market has endured one of the worst spring markets in recent memory. Activity in the grade market has been solid enough to keep mills running but nowhere near strong enough to challenge the market. Mills have been hesitant to take downtime for fear of benefitting their competitors.
The entire softwood forest products industry has been operating on a hand to mouth basis to deal with the unusually soft spring market. There is little to no downside to the current market, but over-production seems to be more of a problem than lack of demand.
Industrial softwood supplies have grown to borderline glut proportions. Prices have been steady to slightly soft. Prices for economy and utility material hit the mills’ resistance level early in the year, so prices are stuck at very low levels. Mills have been open to counters when their surplus grows uncomfortably large, particularly at the end of the month.
The largest obstacle to selling industrial softwood into the pallet industry is the build-up of inventory at pallet manufacturing companies. Many Western pallet producers have been buying the bargains, expecting the normal spring price rise. Pallet lumber inventories are fairly stout, leaving buyers apathetic despite the bargains that are available and the lack of downside risk.
Dry and green stock moved into a close trading price range. Delivered prices of dry material are carrying a slight premium in the Northwest. The freight advantage has dry stock selling at nearly the same price level as green in California.
The price gap between economy 2x4 and 2x6 has closed to a more traditional range. Economy 2x6 has been a difficult sell to the pallet industry because many pallet specs have eliminated the product whenever possible.
Supplies of mill run rough are difficult to find. Pallet manufacturers that have contracts for MRR have remained well supplied. Supplies of the non-contracted MRR material have been on again, off again for six months. This has pushed pricing for MRR out of the workable price range for pallet production.
Canadian cut stock suppliers have been fighting the odd market for months. The strength of the Canadian dollar against the U.S. dollar prompted attempts to hike prices. Aggressive pricing by some suppliers stymied potential price hikes in California.
Pallet demand has been showing signs of improvement in the West. The improved activity still leaves much to be desired.
Pallet prices have held steady in the West.
Recycled Pallet Market
The recycled pallet market is experiencing a mild tightening of core supplies amidst strengthening pallet demand. Core supplies are close to average for this time of year. The overall market is sufficiently supplied, but core surpluses from earlier in the year have dwindled.
The tightest core supplies are in markets reporting the strongest demand.
The ratio of inbound core supplies of #1 GMAs as compared to #2 GMAs shifted this month with #1 GMAs commanding the lion’s share of business in markets that are hot. In some areas #2 GMAs traditionally have been a high percentage of the market; these areas did not experience the shift in demand.
Demand levels in the recycled market range from average to very strong. Seasonal demand in some markets, particularly in the South, has been almost too strong. Weather, tight lumber supplies and higher prices have tilted some new pallet users into the used pallet market.
Inbound and outbound #2 GMA volumes remain close to a balance in most reporting regions. There are still surplus volumes of #2 GMAs evident in some areas.
The Western market is solid to strong. Activity in agribusiness markets is stronger than normal, even for peak season. Market sectors other than agribusiness are also fueling seasonal activity in the West.
Core acquisition prices continue to hold steady in all markets.
Last-minute orders continue to cause problems. The tight supplies and solid demand make accommodating last-minute activity difficult.
Recycled pallet prices are holding steady despite being very competitive. The improvement in demand helped ease some of the competitive price pressure.
(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.)