Hardwood Pallet Market
The ongoing saga of what has become the low-grade hardwood shortage is now over three years old. Each time that the market seems to adjust and level off, a new twist or wrinkle interrupts the potential relief.
Raw material availability had been improving steadily all summer in most areas east of the Rockies. The improvement was modest, however; inventory levels improved but not in line with summer expectations.
Log supplies improved in many areas, but supplies of low-grade hardwood did not improve comparably.
Markets that compete with the pallet industry for low-grade hardwood have been a continual part of the problem the past three years. Railties and switch ties continue to provide strong demand, but the volume of ties cut by mills seems to have caught up with the very stout demand.
Board-road/crane-matting for oil exploration has been in strong demand over the summer, but this market also is seeing supplies overrun stout demand. Grade markets have faded slightly again, but log costs have not. This encourages sawmills to focus on lower quality logs while seeking the most bang for the buck in return. Board-road demand was strong enough and the pricing attractive enough that the product was drawing interest from mills well outside normal market areas. Steel blocking, mining timbers and framestock also remain in strong demand.
The strength of these other industrial markets has diverted material away from the pallet industry and limited the amount of low-grade hardwood that goes to the pallet market. This has kept in check the improvement in low-grade hardwood availability.
The biggest challenge of competing with these other users of low-grade hardwood is their ability to outspend the pallet industry.
Low-grade hardwood pricing has been mainly steady for several months. Fuel and freight costs have caused some fluctuations in pricing. Low-grade hardwood buyers often were able to offset the higher freight costs by purchasing enough material closer to home. The shorter freight hauls helped to reduce their delivered costs.
Quality concerns have arisen because mills are focusing more on lower quality logs and other industries that pay more for low-grade hardwood. Hardwood buyers have found quality to be a continual fight in 2006. The overall lack of quality has created larger waste factors, which have made the actual usable material more expensive.
Pallet demand has been solid if not strong this year. Late summer brought some traces of hot-and-cold pallet demand, but it did not last long. Most companies report slightly slower demand but most remain comfortably busy. Some pallet companies have not experienced any slowdown, and some have to run overtime. However, most companies have seen some slowing. Most report being busy, but the market lacks the urgency of earlier in the year.
Pallet prices fluctuated both up and down in response to fuel price moves. Still, pallet prices were largely steady.
Western Pallet Market
The softwood grade market in the West was a virtual train wreck this summer despite a modest spike and market run early in the spring. The difference this year: housing was soft. Housing numbers were not bad compared to traditional levels, but sawmills had adjusted to the larger demand that the recent market had created. The market held steady into July but not much further.
Grade prices went into a freefall, and industrial softwood markets in the West were not far behind. Sellers of industrial material entered the spring positioned for another strong spring run that never happened.
Economy material was suddenly everywhere. Lumber buyers were able to find just about any cut at any time, and prices quickly reflected the abundant supplies.
The pricing disparity between economy 2×4 and economy 2×6 earlier in the year in the West quickly evaporated as the surpluses quickly erased the imbalance between the two dimensions.
The price freefall forced utility and even higher grade offerings into the pallet industry’s price range. Value-added remanners were also forced out of the market, making even stronger industrial softwood surpluses.
The widespread use of optimizers has made short length material an increasingly dominant part of the industrial softwood market. Pricing for short-length offerings is understandably weak. Pallet lumber buyers looking to take advantage of the low prices find many tallies on these offerings are not pallet friendly.
The problem is pervasive enough that some buyers say it takes extra work to avoid bad tallies even when buying random length offerings that are heavily weighted with short material.
Prices in the pre-cut market have taken a beating in concert with the falling random length prices. This is just one of the many hurdles besetting the Canadian pre-cut suppliers in the West this year. The currency exchange rate between the U.S. and Canada moved cross-border pricing in the wrong direction for both buyer and seller alike.
Pallet demand has exceeded expectations all year in the West.
Recycled Pallet Market
The U.S. economy continues to perform well despite the slowing housing market. However, the slowing housing market is a larger factor to the pallet industry than to the overall economy. Even in view of these demand drags, pallet demand remains solid for most and quite strong for others.
Recycled pallet demand closed July on an up note and was mainly level in August. Overall pallet demand, both new and used, both lack the urgency of earlier in the year, but demand remains good compared to traditional expectations.
Most recyclers report that order files have shortened much more than demand has tapered off. This creates problems with more last-minute orders than most recyclers can handle.
The modest downturn in demand has not been enough to correct the supply-demand imbalances that have caused problems for recyclers for several years. Most pallet recyclers continue to describe inconsistent, unreliable supplies and solid to strong demand.
Recycled pallet demand has been stronger than supply since the economy began to improve three years ago. The mix of strong demand and precarious supply continues to keep upward pressure on both inbound and outbound pallet prices. Core prices have been bullish due to competition. Core supplies have shown signs of improvement in some areas, but recyclers in these areas feel the improvement has been the result of less demand, not stronger core supplies. We continue to hear from recyclers who are at full capacity due to a lack of supply.
Prices for ready pallets are mainly steady with a somewhat bullish posture in most areas. There are two main factors in the upward pressure on recycled pallet prices. One is fuel costs, which impact both inbound cores and outbound ready pallets. The other is the upward price pressure from the strong demand-tight supply.
Despite the relief from the chaotic pace, many contacts report that the combination of strong demand-thin supply continues to cause problems. Others who are weary from the strong demand are happy to see some relief; they can use a breather before the holiday push begins. The non-stop frenzied demand has become too much of a good thing for some.
After almost three years of nearly overwhelming demand, the market has changed the way many recyclers do business. Being able to turn inventory quickly has become a necessity for recyclers in order to keep up. This working with hand-to-mouth core supplies has gone from an occasional spike in demand to standard operating procedure for many recyclers; it makes seasonal demand spikes a real circus.
Most recyclers report core supplies remain tight but not as unbearably tight as earlier. Core supplies are commonly reported as tight in nearly every region.
The overall quality of the available white wood pallet pool remains a long term concern throughout the pallet recycling community. Core quality has been a much discussed subject since the huge pallet recycling growth of the mid–90s. Some recyclers are encouraged by how strong new pallet demand has been the past two years, feeling that the infusion of new pallets has been a healthy trend. Still, the tight supply and limited number of inbound pallets amplifies the problems that start with declining quality of the white wood pool. The combination of limited supply and waning quality creates a large challenge due to the reduced number of usable pallets.
Most recyclers continue to report a smaller percentage of #1 GMAs in the market because of the reduced number of available, usable pallets. The hand-to-mouth turnaround of today’s market is intensified by the small percentage of #1 GMAs.
The inbound supply of #2 GMAs is unusually tight considering that the overall pool contains a higher percentage of #2 GMAs than #1 GMAs. Many recyclers feel that this is due to a demand shift to #2 GMA pallets by customers looking to control costs.
