While the lumber markets going crazy and supplies of pallet cores being very tight is not a new phenomenon in 2004, what this year demonstrated is that the pallet and low-grade lumber industries have reached a new normal. And that means the old rules get thrown out the window for strategies that some used to consider a bad idea.
That is why the extremely tight lumber and core markets is the Story of the Year for 2014. This new market reality is going to change the industry in many ways. To read a good article on market forecasts for 2015, see the market column by Jeff McBee on page 68. If you don’t get our weekly pallet market analysis, you are missing out on one of the best resources in the industry. Call Jeff McBee at 800-805-0263 to find out more about subscribing to the Pallet Profile Weekly and/or the Recycle Record.
Ok, to understand where the market is today, we need to look back to the lumber market in 2012. For example, the western softwood grade market back then began to see some surprising trends. There was upward pressure on upper grade material. The trend befuddled even the savviest of traders. Prices were trending upward across all grades. That is far from the expected behavior for the dead of winter.
Many mills were operating more according to the calendar than the actual demand. Production had been drawn back, but demand was ramping up.
Upper grade material had climbed in price to a point that first quarter pricing for offshore markets was enough to keep China out of the upper grades. Then the unexpected happened. Chinese lumber buyers decided that since the #2 market had become too expensive that they would simply buy lower grade stock. That is when the market really hit the fan. With China buying only #3, utility and economy material, there was a huge supply shortfall in the market.
The cycle continued in 2013, but the run up was not as extreme as 2012. However, the market conditions were not a walk in the park either.
Now we are reaching the time of year, where the market is poised to repeat the cycle again. The wild card is the Chinese government’s handling of its economy. So when you look out West, Asian buying trends, especially China, is having a huge impact and will likely do so for the future.
In the Eastern United States, hardwood prices have gone through an astronomical rise over the last year and a half. Some people are calling it “Stupid numbers!”
The reason is the dynamic of low-grade hardwood users who spend more than pallet industry and their insatiable appetite – board boards, rail ties, etc.
This summer there was very little downside risk of building a normal lumber inventory, but companies have refused to do that because they were burned in the past.
Most sawmills are making money but that too is running in cycles because the log costs are chasing higher prices, which leads to higher prices that drive log costs.
Existing mills are looking to add capacity to respond to a sound market. Suppliers of machinery are on back order right now.
But capacity has yet to truly catch up with supply. This has led some pallet companies to take extreme measures. For example, the May issue of Pallet Enterprise featured a story on Baker Enterprise, which took the extreme step to not only upgrade its sawmill but to add a company-owned logging crew.
Smart companies are seeking to secure supply lines by developing better relationships with sawmills or logging operators or possibly acquire that capacity and bring it under company control.
Another trend is pallet recyclers doing more combo or remanufactured pallets from recycled lumber. Pallet cores are tight in most markets, and there has not been enough new manufacturing to truly catch up. Some of the supply problems of a few years ago are a bit better. But any huge upward spike in demand would send most pallet companies scrambling.
You can’t do business as usual any more and know that you will have supply. If this is not a major initiative for your company in 2015, it should be.
