Conditions in hardwood markets in Eastern Canada are mirroring those in the U.S. The biggest difference is timing. Canada’s hardwood markets appear to be facing the same problems on an 18-month delay.
Trends and conditions in Eastern Canada’s hardwood market are threatening the financial health of sawmills, much like the U.S.
The overall health of the sawmill industry in the U.S. has been a concern for some time now. The Canadian forest products industry did a good job of insulating itself from many of the factors that impacted the U.S. industry. At the end of the day, however, it turns out that Canada only delayed the inevitable.
One of the factors that helped Canada remain at least partly insulated from the same problems that the U.S. encountered was a favorable exchange rate between the U.S. and Canadian dollars.
The Canadian economy held up better than the U.S. economy, based largely on Western Canada’s booming oil industry, and the Canadian dollar gained strength at the same time the U.S. dollar was losing ground. The wide difference between the two currencies was wiped out rather quickly. The U.S. dollar fell slightly below the Canadian dollar before settling at levels close to even, with the Canadian dollar carrying a modest premium.
Suddenly, Canadian companies exporting to the U.S. lost 20% of their selling price without changing anything.
The problems in the hardwood side of the forest products industry begin with grade markets. Grade hardwood markets have been tough the past year or two. Demand has been uninspired at best, making profitability a challenge. Prices in the grade market tumbled.
Mills have done their best to reduce log costs. This has been a problem for the entire North American market. Log costs often do not retreat anywhere near as fast as lumber prices. This has been the case over the past year and a half as the housing industry has slowed considerably. Although the housing industry has stabilized, it could be a while before there is significant growth in a sector that is vital to the entire forest products industry.
Some of the larger mills in Eastern Canada took additional downtime around the holidays as adjusted log costs had greatly limited log supplies. The downtime allowed mills to bolster their meager log decks.
All seemed to be going according to plan as mills resumed production, then Mother Nature provided the oddest of turns. Temperatures became unseasonably warm for over a week. Snow melted, turning the ground to mud. Temperatures recently returned to normal, and a heavy layer of snow was back on the ground. Contacts report the ground did not have adequate time to freeze, and the snow was exacerbating problems. The mud was enough of a problem that some areas had roads posted for weight restrictions – if only briefly.
Downtime taken by many of the larger mills limited cant supplies throughout Eastern Canada. Pallet manufacturers were forced to look outside their normal supply circles for raw material. Smaller mills took up much of the slack.
The additional output, although needed, wasn’t greeted with an especially warm welcome. The smaller mills helped satisfy demand, but quality was often well below that of larger mills that were off the market.
The difference in quality spurred a two-tiered pricing structure tied to quality. This price structure for cants used to be common throughout Eastern Canada but has not been seen in several years. Prices range widely, depending on the quality of the particular offering. This is a persistent problem that is not likely to change until some of the larger mills begin to come back online or to full production.
Pallet demand in the East was quiet. Demand was not bad, but it settled at stable levels below modest seasonal expectations. Most contacts feel business is okay but are somewhat disappointed at current levels.
Pallet producers that operate on both sides of the border have seen demand from U.S. customers drop by as much as 40%. This is no surprise considering the large swing in the currency exchange rate.
Pallet prices are mainly stable in the East. Contacts are preparing for higher prices on wood. Nail prices have already moved higher. The combination has pallet suppliers anticipating higher pallet prices.
Those selling pallets into the U.S. are not optimistic that pallet prices have room to move considering that the exchange rate moved their prices higher with no benefit to the pallet supplier.
(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.)
