As 2014 draws to a close, it’s press-time for Pallet Enterprise. The January issue is always a good time to look at the direction that current trends (and outside factors) have us pointed.
Weather in the North
East of the Rockies, low-grade hardwood supplies are split north/south. Weather in the North has kept supplies as tight as they were a year ago, if not tighter.
Winter weather arrived in mid-November across the northern tier states. Heavy snows on unfrozen ground in many Upper Midwest states raised concerns throughout the forest products industry across many areas of the North. Some areas of the Upper Midwest received over two feet of snow.
That storm tracked eastward and when it hit Western New York, the two feet in the Upper Midwest looked like child’s play. The storm brought record snows to Western New York in such a fashion that it became the lead story on the evening news and some areas were hit with over eight feet of snow.
It didn’t help that log supplies were already tight due to a persistently wet autumn. Low-grade hardwood availability was already tightening prior to the early snow.
The log supplies were pronounced enough that paper companies were very aggressive in their pursuit of wood. Pulp log bonuses in some areas of the Upper Midwest have reduced inbound gate wood to a trickle as log prices were so high that many loggers were not sorting logs.
Alternative Wood in the South
Low-grade hardwood inventories are better in the South than they were a year ago, but are not so solid as to eliminate concerns over supplies. The improved inventories are not as indicative of an improvement in low-grade hardwood supplies as much as they reveal a shift
in consumption. A year ago when low-grade hardwood was nearly impossible to get, pallet suppliers began to shift
customers to pine. In some cases, vertically integrated mills were sawing
pine logs and offering green pine. In most cases however, the shift was to dry southern yellow pine.
The prevalence of pine use in the South to supplement raw material supplies has reduced the consumption low-grade hardwood and has in turn helped bolster supplies slightly. Companies that moved customers to pine to supplement undersupplied hardwood markets last winter are in no hurry to move them back to hardwood without price being the driving factor.
Hardwood sawmills that now find themselves competing with southern yellow pine for industrial use may find relief soon as the southern yellow pine market has taken on a far more bullish posture lately.
Higher Dollar Low-grade Hardwood Items
The new kingpin in low-grade hardwood markets has been mat material for crane/dragline mats and to a lesser degree, board-road.
The crane/dragline mat market has been on a bit of roller coaster ride in 2014. As can often be the case, inventories of used mats swelled in July. This can raise concerns and this year was no exception. The inventories ballooned up scaring mills that were cutting mat stock, but then those extra inventories were gone by Labor Day. Demand stock returned but was not as strong as it had been earlier.
The oil exploration products are not as big a portion of the market as they might seem. They are certainly driving the upper end of the price range in the low-grade hardwood market. This is due to the proverbial necessary evil. The dimensions require sizeable portions of the heart of the log. For many mills the matt stock cuts into their grade material. Buyers of board-road and mat material adjusted their pricing accordingly. This creates quite a bit of market pressure for other low-grade hardwood buyers.
The volume of low-grade hardwood consumed by the mat market is somewhere between 15-20% of the low-grade hardwood market. There are two caveats to mention regarding “only 15%.” The first is that this market was much smaller ten years ago. The second is that the demand in that market is streaky and can really stress supplies when the market gets hot.
There has been speculation that low oil prices have been part of the issue. That is not likely the case as much of the work on the ground today is for production several years out. Companies that are working that far off on the horizon cannot make such knee-jerk type decisions. If oil prices stay depressed for several years, then it will begin to affect domestic exploration. Currently OPEC has displayed some shaky resolve within its ranks, but that is not likely a long term trend.
Softwood – What about China?
If we trust the mainstream press, the Chinese economy is steady at levels well below what has driven the market over the past several years. Earlier economic growth levels at 11% tilted the supply demand in our softwood markets dramatically.
The China factor influences western softwood markets more than other areas, but it also impacts the southern yellow pine market as well. The biggest influence however is when demand from China strains our supply capacity and prices spike dramatically. China’s buying patterns adjust as prices escalate. As prices climb, China moves into less expensive grade material, which places dramatic pressure on industrial softwood markets.
China’s economic growth in 2014 cooled. Most of the published growth numbers estimated China’s economic growth slowed to around 7%. Most accounts project China’s economic growth for 2015 to remain level at similar levels to the second half of 2014. One projection had 2015 the economic growth target at 6.9%. If China’s growth remains around the 7% level, it will be the country’s weakest economic growth year since at least 2007, according to economists’ estimates published by Bloomberg.
The offshore-induced pain and chaos of the last few years has occurred in late autumn. That has not occurred as of this writing. Contacts in industrial softwood circles are now debating on whether or not we will see any kind of market push due to China’s influence.
The Ever-murky Crystal Ball
There are many factors however that cannot be predicted. Will the U.S. economy continue its slow, steady recovery? Will the Affordable Care Act have an impact? Will China step into the softwood market and disrupt it? Will interest rates remain low? Will oil prices shift? The current trends in most lumber markets are pointing to more stability than what we have seen over the past few years. We can at least hope.
(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.)
