There is an old adage that says, “The more things change, the more they stay the same.”
I never have found that one to be functionally practical the way many old sayings can often be. Maybe it actually refers to technology changing and human state, or “The more things change, the more people stay the same.”
When trying to get a feel for the short-term future of industrial lumber markets in North America, a good working title is the more things stay the same, the more they stay the same.
That may be a bit of a spoiler for the rest of this article, but I wouldn’t anticipate a lot of change in industrial lumber markets in 2012. Will there be any change in industrial softwood markets in 2012? It’s not likely. Will there be any big moves in low-grade hardwood markets in 2012? I don’t see them on the horizon.
Western Industrial Softwood
The biggest shift in softwood markets over the past few years has been the result of a factor outside of North America.
There was a trend that started back in 2008. The U.S. economy was healthy to start the year, but by June it had begun to show some downward trends. Meanwhile, China’s lumber purchases from the U.S. and Canada swelled from 3.6 million board feet in 2007 to 524 million board feet in 2008. Percentages don’t do that sort of increase justice. 2008’s total represented over 145 times the volume of 2007.
China’s lumber purchases have continued to grow each year since. The numbers for the first eight months of 2011 eclipse the total for 2010, despite a slowdown in offshore markets that began in June and grew progressively slower into our mid-November press time.
US & CANADA
2007………………………..3.6 million bf
2008……………………….524 million bf
2009……………………..1.122 billion bf
2010……………………..2.052 billion bf
2011*……………………2.340 billion bf
*(through Aug.)
Offshore markets were a dominant factor in industrial softwood markets in 2010 and 2011. Pallet lumber buyers were especially challenged because softwood production was below traditional levels by a wide margin.
There was less downfall and mills shipped anything that they could into the offshore markets that were paying more for the product.
This had two negative impacts for North American pallet suppliers. The first was in availability. There was simply less random length economy to go around. That limited availability kept prices in a bullish posture. Even when the market languished some, the offshore factor served to keep prices propped up for a while before natural concessions occurred.
The second impact was in the quality of the economy material that didn’t get shipped out to offshore markets. The quality of random length economy stock in local markets turned ugly in late 2010 and grew progressively worse this year.
Pallet manufacturers found themselves paying more for lumber that was yielding less material. Trying to explain that phenomenon to a customer who wants justification for a forthcoming price increase is difficult at best.
There is no reason to think that China will not continue to buy at a similar pace in 2012. In fact there is evidence to suggest that they will buy even more in 2012.
The problem is that the lack of a solid grade market here has many mills dedicating the lion’s share of their production to offshore orders.
There is some hope for western softwood pallet manufacturers. It seems that China’s purchasing habits are shifting. Given China’s earlier influence on domestic stock, it stands to reason that any shifts in the way China does business is likely to change the market dynamic that was affected earlier.
One of the shifts that offshore markets brought was a narrowing of the price gap between #2 and #3 material. With #3 offerings commanding similar money to #2 stock, it’s very understandable that the quality of economy material suffered. Mills were pushing anything that passed #3 grade into offshore markets. Material that previously might fall to economy, was now going to offshore markets.
It appears that China is now adjusting its buying patterns according to our grading system. Most of the current activity from China is focused on higher grades. This is no surprise as it follows domestic trends. There is a good chance that #3 material will fall out of favor in offshore markets. This would likely return pricing between #2 and #3 material back into a more traditional spread.
The impact of a traditional price spread and stronger #3 supplies would be good news for the North American pallet market in two ways. It likely would bolster both economy and utility supplies while likely restoring some respectability to the quality of material currently being offered as economy.
From the pallet community’s perspective, the overall softwood market in 2012 is likely to look a lot like it did in 2011, with the possibility of some modest relief.
Low-grade Hardwood
It is no secret that the housing market is the engine that drives the entire forest products industry. The housing market is a huge factor in the overall economy as well.
In 2008, the economy followed the housing market down to an ugly bottom. Since then the entire forest products industry has suffered.
The softwood industry has found some solace in offshore markets. Hardwood sawmills have seen their export markets grow some, but have not found the same sort of growth that softwood has.
The largest difference is the application of the wood exported. Higher grade hardwood goes into immensely different markets. So while demand for higher grades of softwood was being supplemented by offshore activity, the hardwood grade market languished.
Weighted prices for #1 common hardwoods currently are the lowest in the history of such record keeping. The lack of a grade market led hardwood sawmills to employ two strategies.
The first step for hardwood mills was to lower production. Many mills scaled back production to limit exposure to poor returns as log costs generally hadn’t retreated nearly as quickly as prices of lumber. Shutdowns and suspensions of operations were common. The mills that continued to run often ran just enough to meet financial obligations, while keeping key employees.
The second strategy was to focus their sawing and marketing on sectors that displayed better stability. This had hardwood mills focusing on low-grade markets.
Catering to industrial hardwood markets as much as possible made sense on multiple levels. Unlike the grade market, there was some consistent demand for low-grade hardwood in industrial markets. The main benefit however was stability of the pricing. Rail ties and pallet material were unique in the hardwood market in that they hadn’t surrendered the same concessions that the grade market had.
Mills were also able to be more selective about logs. This was another way of limiting their exposure in subdued markets.
Some mills are avoiding the grade market to the best of their ability due to lackluster pricing and demand.
The solid to strong demand for rail ties, pallet cants, board road, crane and dragline mats have carried sawmills in some areas. The demand in these sectors helped to stabilize prices that might have otherwise been soft.
The financial return for mills from the other low-grade hardwood material other than pallet-related material made the pallet industry the third option, diverting a substantial amount of low-grade hardwood away from the pallet industry.
The pallet industry’s usage levels aren’t anywhere near traditional norms, but the limited production has kept supplies near to a balance with current availability.
The absence of a healthy housing market has resulted in this low production market that caters to the industrial hardwood applications. Until there is some shift in the housing market there is little reason to expect any of the market dynamics to change the current market for the better from the pallet manufacturers’ perspective.
Don’t hold your breath for that sort of change in 2012. The housing market may find some strength in 2012, but most projections show slow growth that has been the trend the past two years. Economists tend to be optimistic and most are looking at 2013 or even 2014 for any serious moves in housing. There are a few projections that hold out hope for measurable improvements by late summer of 2012.
In any case, trends in low-grade hardwood – and industrial softwood for that matter – are pointed towards more of the same in 2012.
