Market Update: Hardwood Supplies Improve To Low; Pallet Demand Strong

Low-grade hardwood supplies east of the Rockies finally began to show some signs on modest improvement in June. It is hardly a complete turnaround but welcome relief nonetheless. In many cases the gains are a shift from critical supply levels to low levels that still leave pallet companies struggling to maintain a working inventory.

Many of the areas that have improved have done so at the expense of the soft hardwood grade market. The large concessions in flooring and No.2 common and No. 3 common oak have pushed sawmills in other directions. Mills first responded to these conditions by not sawing so far into the heart of the log. This helped to improve cant supplies in some areas over the short term.

The decline in flooring markets has been bigger news throughout the forest products industry. Demand in the flooring market is still strong but not as stout as earlier in the year. Sawmill production has outpaced demand all year. In most areas this has resulted in more low-grade 4/4 material. The trend also forced some sawmills to curb production, which resulted in less cants in many areas.

The grade and flooring markets are not the only market sectors impacting low-grade hardwood supplies. Competing industrial hardwood markets all remain solid to strong; they continue to provide strong competition for low-grade hardwood that the pallet industry desperately needs. The market for railties and switchties has been white hot. Steel mill blocking is a particularly hot item. Oil operations in the Southwest are also consuming large volumes of low-grade hardwood for crane mats and board road. Framestock has also been a solid market.

Paper companies have been aggressive most of the year. Cooperative weather in May and June helped ease pressure from pulp and paper markets in many areas; paper companies began to lift pulp log bonuses that had been in place for months in some areas.

Despite recent improvements in weather and some subsequent gains in low-grade hardwood availability, very few areas have inventories that are close to normal. Most find the gains have been minimal, leaving the supply picture uncertain.

Spring has been longer, colder and wetter than expected in the Northeast, putting more pressure on already thin supplies. Cant prices were increasing in the region in early June.

Raw material prices have once again stabilized after another round of decidedly bullish pricing. Some of the recent upward pressure was market related, but fuel increases began to drive freight costs, which in turn forced delivered lumber costs higher.

Pallet demand is in full stride. Pallet suppliers often are as busy as they were late in 2004 and running overtime. The limited supplies of raw material makes current business levels almost uncomfortably busy.

Pallet prices increased in April on the strength of demand and higher costs for raw material. Fuel surcharges also moved delivered pallet prices higher. Prices stabilized by early June.

The Western grade softwood market has been on a roller coaster ride this year. The grade market took off earlier, much like last year’s frantic run, and skyrocketed in February. Random length economy again became a target of remanufacturing facilities, which used the $200 price spread to upgrade for other value-added products.

The pallet industry was more prepared this year, but that did not stop the other market forces from behaving the same way. The cold, wet spring in the East weakened construction markets. Suddenly the grade market was in a free-fall. The value-added remanners were left holding upgraded material that was overpriced.

Pallet industry inventory levels were in better shape this year, leaving no interested buyers in the industrial markets. This put pallet lumber buyers squarely in the driver’s seat. Mills, knowing that weather would not hold down the construction market forever, continued to run strong. More industrial material was forced into an already well supplied market. Suddenly the market went from tight supplies to a borderline glut. The grade market was coming back around in early June but the industrial market remained oversupplied.

Canadian pre-cut suppliers in the West continued to work to find a profitable slice of the market. Some worked strictly on price spreads and found activity very slow. Others forced sales with lower prices generating cash flow and sometimes red ink.

Pallet demand began the year surprisingly solid in most Western markets; with the exception of some slowdowns in construction-related accounts, demand remains strong.

Pallet prices in the West moved higher on the strength of raw material prices but stabilized by early June.

The good news: recycled pallet demand is strong. The bad news: recycled pallet demand is strong.

This has been the plight of the pallet recycler for over a year now. Demand is strong, which is good, but trying to meet strong demand when core supplies are nearly nonexistent presents a barrel of problems.

Recycled pallet demand east of the Rockies is not just strong but unusually robust – even considering the time of year. There are some pockets of slower activity, but contacts report that even in these areas business levels are solid. Most of the slower activity seems to be tied to the lack of construction-related business, which has been impacted by poor weather. Even in these areas weather is improving, and pallet demand is improving along with it. Most contacts are quite optimistic about the market’s continued strength.

Many recyclers report demand at or near record levels. Demand is outstripping supply in most markets, and recyclers find it difficult to keep up with the pace. This is indicative of how strong demand is throughout the recycling industry and is a continuation the strong growth of the past 18 months.

The biggest obstacle facing recyclers is the lack of recyclable cores. The strong demand has taken a toll on core supplies.

Core supplies are extremely tight in all regions east of the Rockies, and supplies are approaching critical in some areas. Core supplies are losing ground as they continue to tighten in all areas.

The shortage is so intense enough that even #2 GMAs are reaching critical levels in some markets.

Strong retail demand is limiting the flow of cores coming out of some distribution centers. This continues to reduce the accessible pool of recyclable cores.

Strong demand levels are spurring greater circulation of the limited number of available pallets. This further fuels the hand-to-mouth turn-around forced on pallet recyclers.

The percentage of #1 GMAs in the inbound core supply continues to dwindle and is at historical lows. The lower percentage of #1s in an ever-shrinking pool of available pallets also fuels the hand-to-mouth nature of the market.

Core supplies in the West were in good shape earlier in the year but have become nearly nonexistent. Some of the worst core shortages are in Western states. Like the East, the West is experiencing strong demand and thin supplies. Core supplies have diminished to the point where many recyclers are working with hand-to-mouth supplies. Supplies of #1 GMAs are very limited in the West, too. Core inventories in the West are nearing critical levels, particularly where agribusiness markets lean heavily on recycled pallets.

Inbound supplies of #2 GMAs are mixed. Many contacts report inbound #2 GMA supplies are below expectations, and some say demand has made #2 GMAs nearly nonexistent.

Recycled pallet prices are bullish. Price increases have been somewhat inconsistent but the upward trend seems to have caught its second wind. Prices seemed stalled a month ago but now are moving higher on the strength of demand. Some recyclers are trying to scare away some customers with price increases; the strategy has been ineffective at running away customers but very effective at improving the bottom line. Recyclers face the dilemma with mixed emotions; some are on their third wave of increases intended to thin their customer base.

Customer service demands continue to press recyclers. They already are forced to scramble to keep up with strong demand in an undersupplied market. Stronger service demands are an unwelcome yet necessary evil. Many services used to be considered gravy for the recycler; in today’s market, customers have come to expect them.

Last-minute orders are so common that they have become the norm; they cause daily problems for recyclers.

Premium quality recycled pallets remain in strong demand. Shifting production and delivery schedules to take care of these orders often strains recyclers, especially when premium pallets are a large part of the problematic last-minute orders.

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