Even as stocks plummet and headlines scream about recession fears, pallet demand remains overall solid. While pallet supplies are better than last year, they are certainly not robust as overall demand remains fairly high.
The big question is, “How long will solid pallet demand last?” A recent survey by The Wall Street Journal found that economists see interest-rate increases raising the likelihood of recession to 44% in the coming 12 months. This is up from 28% in the Journal’s last survey in April.
By the time this editorial is published in early July, the country may already be officially in a recession, which is two consecutive months of negative growth. But a mild recession may not be horrible for the pallet sector. Let’s explore why.
For starters, one of the largest competitors to white-wood pallets is having trouble servicing customers. Earlier this year, Brambles, the parent company of CHEP USA, warned investors that its global pallet network is still facing supply challenges.
Brambles’ CEO, Graham Chipchase said, “The supply chain dynamics and inflationary pressures we noted in the first half of the year were further exacerbated in the third quarter by the conflict in Ukraine and Russia. Ongoing disruptions in global freight and lumber markets continue to impact the flow of goods across supply chains resulting in higher costs across our business.”
Chipchase added, “We continue to face pallet availability challenges with ongoing constraints on new pallet supply and lower than normal pallet returns in all regions. As a result, we are continuing to see lower pallet repair activity across our network which we expect to normalize in FY23. Our teams are working around the clock to improve asset efficiency and secure new pallets to service our customers and create capacity for new business growth.”
The Australian Financial Review recently reported, “There is no end in sight for the pallet shortage…Retailers around the world have been lifting stock levels in warehouses to ward off product shortages and are stockpiling empty pallets as a safeguard as supply chains buckle.”
In some cases, traditional rental customers have switched to white-wood pallets to secure supply. This has put tremendous pressure on the recycled pallet market. Companies desperate to find pallets have even switched to new pallets to ensure products reach the store shelves. This has led to the smallest price differential on record between new and used pallets.
The Great Recession, which lasted from December 2007 to June 2009, was the longest economic downturn since World War II. During this recession, new pallet activity slumped first followed after a while by recycled demand. But this time the difference in price between new and used pallets is much less than it was back in 2007. So, the overall trend from the last downturn could be different. A recession could bring some recalibration of market differences and restore some more normative price breakdowns. Don’t get me wrong. We are probably never going to see $2 to $3 core prices ever again. But as new pallets become cheaper as low-grade softwood lumber price drops, used pallets have to respond in kind or customers will just switch to new pallets.
More customers opting for new pallets will eventually help build up the pool of used pallets again. The only problem is that this time around pallets are being engineered with even less lumber than in the past. That means fewer quality cores on the market in the long run. A recession could be just what the pallet market needs to limit price escalation. The Federal Reserve’s actions to raise interest rates another .75 of a point in June, as well as indicate more potential rate hikes in the future, are likely to damper strong economic growth over the next year. As demand goes down, price premiums will lower as consumers pull back on spending.
A mild recession could give pallet companies a break. Many have been working overtime and then some to supply existing customers and even take on new accounts that have been desperate for pallets. A mild recession could provide breathing room as companies try to keep from overtaxing their workforces. It could also be the right time to institute automation for the next upswing.
All recessions eventually end. And the companies that position themselves right for the future will be in the best position to win no matter what the next year holds.
Pallet demand could remain fairly strong even in a mild recession because the supply chain has become more complex since the COVID-19 pandemic kicked off an even greater retail revolution thanks to omni-channel distribution. However, the boom in pallet demand over the last two years will likely go down as retailers work off inventory, reduce safety stock and respond to a more selective consumer thanks to inflation.
Looking long-term, the overall probability for growing pallet demand looks strong based on increased palletization around the world and growing populations. E-commerce and omni-channel distribution will provide a strong base for solid growth. The pace may not be what we have seen over the last decade. Hopefully, it could be more manageable.
If we enter into a recession, the industry will adapt. Smart companies will work on their plans and continue to automate. They will look to combine the right tech and operational efficiencies to ensure success. Now is the time that leaders lead. What’s your plan?
