The feeble conditions of hardwood grade markets east of the Rockies have been well publicized the past year and a half. Poor demand caused by the slumping housing industry had a whiplash effect. The poor demand has translated into poor pricing.
The end result is one of the toughest business climates faced by hardwood sawmills in a very long time.
As grade prices tumbled, mills worked anxiously to make financial sense of the depressed grade markets. They have used several time-tested strategies.
Mills have lowered production and taken more downtime than they would like. Often they have been running just enough production time to pay for essential financial obligations but little more.
Another strategy, although harder to implement, is to focus on lower grade logs. This strategy depends on solid demand from industrial hardwood markets. Fortunately for hardwood sawmills, industrial hardwood products have been in high demand. In fact, low-grade hardwood items have been one of the few bright spots in an otherwise dreary market.
Industrial hardwood buyers have been the main financial support for sawmills in the current market. Framestock has seen somewhat of a revival and once again is in moderately solid demand. Other products in strong demand include blocking for the steel industry and mining timbers. Flooring has provided some decent activity. Railties and switch ties have been a key element in the industrial hardwood market; the railtie industry has displayed solid to strong growth, and projections indicate continued growth although it may be leveling off. The real show stopper in the current industrial hardwood market is board-road/crane-matting; these domestic oil industry products have brought big money by industrial hardwood standards.
The combination of lowered production and strong demand for low-grade hardwood from industrial markets has been a big part of keeping hardwood sawmills running.
The combination has been good for pallet lumber buyers. Low-grade hardwood supplies have been solid in most areas despite lower production levels at most mills.
However, the market may be shifting some. The reduced production at sawmills went largely unnoticed for a long time. The focus on industrial material nevertheless enabled many pallet manufacturers to build inventory. Eventually, though, several factors began to impact the market.
The extended focus on the industrial market had a side effect. When a large percentage of hardwood mills turn their attention to one portion of the market, the result is often predictable. Production was easily able to outrun the market.
This explains why raw material availability improved despite lower production at sawmills. The concentrated focus on industrial hardwood markets enabled pallet manufacturers to build inventory while servicing solid pallet demand. This was the first time in several years that pallet manufacturers had this sort of raw material security accompanied by solid to strong pallet demand.
Now, the industrial hardwood market shows signs of hitting the wall. After sawmill production outpaced the market’s demand, sawmills began drawing back production even further. Suddenly, railtie buyers had to work to procure all the material they needed. Loggers were being forced out of the woods for lack of work.
Although industrial hardwood has been one of the strong sectors in the current market, prices cannot support log costs in a market where grade prices continue to wither.
The trend of sawmills pulling back production even further is troubling for the industrial market. This could be a standoff that no one wins.
This raises more questions instead of providing answers. Are sawmills in for another round of auctions? Will there be log price concessions large enough to encourage mills to begin sawing again? Without a housing market to fuel grade market production, will industrial hardwood prices press upward in the absence of grade demand?
The market cannot continue on its current course. Fuel and energy costs are applying upward price pressure on low-grade hardwood in a market that is not ready to pay it.
(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.)
