I was at the filling station, pumping gas and thinking that $3.63 per gallon was quite the bargain for our area. It made me stop and think: $3.63 is a bargain?! And diesel is even worse – close to $1 per gallon worse. Wow! It’s been a tough couple of months.
One of my favorite rants around the office lately has been the interrelatedness of past recessions and energy costs. The U.S. has avoided a recession – by definition anyway. Thankfully, there are enough good things going on with the economy. Unfortunately, fuel costs are not part of the good news.
Energy costs are wreaking havoc on the entire forest products industry. There is no area or sector that is not impacted and impacted heavily.
Logging has been taking a big hit over the past few months. This is especially disturbing because of the shrinking number of logging companies. It seems that there is natural attrition in the logging industry every time the forest products industry goes through a downturn. This latest trough has been particularly tough as the grade market has been poor. The market had been slumping for close to a year before energy costs began to soar.
Loggers are directly impacted by fuel costs with virtually every step of their business. Whether it is something as small as a chainsaw or as big as a feller, skidder or loader, it all requires fuel. In addition, they have to haul their wood to the mill. Each handling of the wood involves additional costs that are impacted by the soaring fuel prices.
The impact is far-reaching, and it is felt along the entire forest products supply chain. The industry may not yet realize just how far-reaching is the impact.
Loggers already were struggling before fuel prices began to skyrocket. Some logging companies could not absorb the added cost or adjust quickly enough. We received a report of an auction with over 100 pieces of logging machinery.
Every downturn in the forest products market over the last 20 years has taken away some of the industry’s logging capacity. This latest downturn has been especially tough on loggers. Sawmills have been vocal about the dwindling amount of loggers in the woods and the long-term outlook as it applies to the industry.
Trucking has become a trouble spot, too. Sawmills report difficulty in obtaining trucks, especially in the Southeast. Like loggers, truckers already were struggling prior to the shift in diesel prices. Again, like the logging industry, some trucking companies could not adjust or did not have enough cash to weather such a drastic increase in fuel costs.
Sawmills and pallet manufactures are both impacted on nearly as many fronts as loggers and truckers. Gasoline prices are up. Diesel prices are up. Propane prices are up. Electricity is also up in some areas.
These translate to higher production costs, higher heat-treating costs, higher freight rates and delivery costs.
I am not normally one to spread doom and gloom, but the spike in energy costs is having a major impact on the pallet industry.
There may be at least one silver lining in this black cloud of high energy costs, though. Pallet prices are moving up.
That may not seem like much to the casual observer, but it is very rare for pallet prices to increase when the price and availability of wood are steady, which is clearly the case in the current market.
Nail prices also have been very bullish; along with energy costs, they are at the heart of the upward move in pallet prices.
Nail prices have increased sharply. There are a number of factors driving up nail prices. The soaring cost of steel is the primary cause, but import tariffs and delivery costs are also placing upward pressure on nail prices.
Each separate cost in manufacturing a pallet seems very small compared to the overall price of the pallet. In many cases, pallet manufacturers have done their best to absorb increases in some of these costs. However, when so many costs move higher at the same time, it is an exercise in frustration to try to keep pallet prices steady.
One pallet company enjoyed surprisingly solid demand in the first quarter, but the owner was shocked when he reviewed his financials for the quarter. “I was shocked at how much the energy costs had impacted the bottom line,” he confided.
This is solid evidence that when multiple costs increase at the same time, regardless of how modest they may seem, they can hardly be ignored.
Fuel, freight, and delivery costs along with higher nail prices have trimmed margins even more; they have gone from razor-thin to beyond painful.
The pressure of all these costs rising at the same time leaves pallet makers with no choice but to increase prices. Most pallet price increases are in the 4%-6% range, and pallet price increases are registering in most areas.
(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.)
