Market Update: Hardwood Prices Rise In the Wake of Katrina

Hardwood Pallet Market

Louisiana was still under water, and Hurricane Ophelia was poised to hit the Eastern Seaboard as mid-September approached. The 2005 hurricane season already has been quite active. However, we are just reaching the normal peak of hurricane season.

It is difficult to assess how much of the Gulf States region customer base has been damaged or even lost in the aftermath of Katrina.

The loss of timber in the region is also huge. The Mississippi Forestry Commission estimated the timber losses at $1.3 billion. The price of low-grade hardwood that is available in the Gulf States region already has begun to rise, but it was not a knee-jerk reaction. Supplies were already tight in the area, and price increases could be felt long term.

The devastating storm will continue to impact everyone in the pallet industry at least in the short term.

Fuel price spikes have begun to retreat, but energy market experts say it may be six weeks before they return to pre-Katrina levels. The pre-storm prices were up 20% from earlier levels. Fuel prices were already problematic, and the recent price spikes made fuel costs the top concern for the forest products industry.

Low-grade hardwood supplies are tight in most areas east of the Rockies. Despite modest improvements in some areas, contacts already are voicing concern about inventory levels. It seems almost certain the pallet industry will face another winter with minimal buffer inventories for surviving poor weather conditions.

Low-grade hardwood is getting more expensive. In some areas actual prices are moving higher. Other areas are seeing price pressure from spiking fuel prices forcing freight costs higher – which in turn drive up actual delivered prices.

Robust industrial markets have provided problematic competition for the pallet industry over the past few years. Railties have been the strongest sector and this market shows no signs of slowing. Other competing markets, such as framestock, board road for oil companies and other industrial products, are enjoying strong demand and are easily able to outspend the pallet industry.

Pallet demand east of the Rockies has been solid to strong all year. There have been some mild activity lulls at times, but overall pallet demand has been quite strong. Demand during the third quarter was comfortably busy at levels slightly below the frantic pace from earlier in the year. Current demand levels are trending upward and pushing activity back toward the frenzied levels.

Pallet prices are pressing upward in reaction to the latest fuel price moves. Pallet suppliers have been working frantically to adjust pallet quotes due mainly to the higher fuel costs.

The Western grade softwood market has run hot-and-cold all year. The latest turn was a spike in prices in the grade market in response to Hurricane Katrina. Prices spiked on strong activity in the grade market that centered on grade resellers replenishing inventories after working the last six weeks with hand-to-mouth inventories.

The softwood market was more subdued recently. This is just the latest twist in a market that has been volatile all year.

The market took off in the first quarter, appearing as if a repeat of 2004’s frantic market was imminent. Industrial material didn’t follow in the same manner, and when the grade market retreated, the industrial market fell hard.

The pallet industry anticipated a repeat of 2004 and was better prepared. Inventory levels in the pallet industry were in far better shape than last year. When the industrial market faded, there were no buyers for industrial stock. Pallet lumber buyers found themselves squarely in the buyer’s seat.

Strong production schedules at mills accommodating the housing market pushed more industrial material into a well supplied market.

Industrial softwood lumber supplies have been fairly plentiful all year and were bordering on a glut in August. Availability eroded slightly as mid-September neared. Economy material was readily available but not as plentiful. Sellers reported that Katrina-related activity had allowed the industrial market to find a price floor.

Canadian pre-cut suppliers in the West have struggled to find profitability in the on-again, off-again softwood market. After bottoming out, pre-cut prices pressed upward largely due to fuel prices.

Pallet lumber buyers spent much of the third quarter trying to reduce inventory. In attempts to avoid a repeat of 2004, many companies laid in a heavier than normal inventory. The large concern was the price of the inventory was much higher than cash prices. Those with heavy inventories were concerned that pallet prices would begin to drop while they were still trying to work through the heavy inventories.

Pallet demand in the West has been surprisingly solid in most markets all year. Demand in the West had remained stout but grew stronger as the summer progressed.

Pallet prices were mainly steady at levels established at the height of raw material prices. Fuel, insurance, and other non-material-related costs have risen, taking away any gains made while lumber prices were fading.

Core supplies have been steadily tightening the past 18 months. The trend seems to have no end. Core supplies are so tight that it seems impossible they could get worse. Contacts were making the same observation a month ago and the supply has gotten worse.

In markets where seasonal demand is at its peak, recyclers have been forced to reach farther away than ever before just to satisfy the demands of their primary customers.

Core supplies are extremely tight in all regions east of the Rockies. Core availability ranges from tight to critical. The fact that supplies continue to tighten is disheartening to many.

Some areas report that core shortages are severe enough that even #2 GMAs are beginning to reach critical levels.

The percentage of #1 GMAs in the inbound core supply is in steady decline as the size and quality of the available pool of recyclable pallets continues to decline. The lower percentage of #1s available in the shrinking pool of available pallets makes the hand-to-mouth nature of supplying the current market more difficult than ever.

While core supplies are declining, recycled pallet demand east of the Rockies is unusually robust. Activity is strong even in view of seasonal expectations. Construction-related business and other heavy industrial activity are strong. Agribusiness markets are also fueling demand.

Demand is strong enough that many recyclers report record months. Even the softest markets are reporting solid activity levels.

Recycled pallet demand is strong and supplies are thin in the West. The Western markets reflect conditions of the Eastern markets. Many Western recyclers report that core supplies have diminished to the point that they are working with hand-to-mouth supplies.

Supplies of #1 GMAs are in particularly short supply in the West. Core inventories in the West have been at critical levels for nearly two months, and agribusiness markets that lean heavily on recycled pallets are a large factor.

Inbound supplies of #2GMAs are more mixed than usual. The best reported inbound #2 supplies are below expectations while some areas where #2s are always in high demand report supplies to be nearly nonexistent.

The combination of strong demand and short supplies has strengthened pricing throughout the industry on both cores and ready pallets. Prices for cores and ready pallets are steadier than a month ago but prices continue to press upward.

The combination of higher demand levels and incredibly short core supplies forces recyclers to turn pallets faster than ever. Conditions require faster circulation of the limited number of available pallets. This further intensifies the hand-to-mouth turnaround cycle that pallet recyclers are forced to perform.

Customer service demands only make matters worse in this hectic climate. Additional services that used to be considered gravy money for the recycler are now done at no charge to keep key customers happy. The circumstances have turned so much that the customer considers these services a given in today’s recycled market.

Last-minute orders are a growing problem. Although commonplace, this is one of the many services that customers now view as a given regardless of how complicated accommodating them becomes.

Premium quality recycled pallets remain a very high demand item. These premium pallets are higher priced and usually go to the recycler’s best customer. It is no surprise that warehouse or club pallets often are at the heart of the last-minute orders.