The Bully Buster
Board road, crane and dragline mats became the bully of low-grade hardwood markets over the past several years. Trends and conditions within low-grade hardwood markets appeared to have no remedy for the shortfall of low-grade hardwood. The prices commanded by the mainly oil exploration products were driving stumpage prices. During the worst of 2014’s low-grade hardwood shortage I talked with a pulp buyer at a major paper company who marveled at the impact that mat stock was having on the market. Then oil prices plunged to a six year low hitting $42.85 a barrel.
That took the wind out of the collective sails (no pun intended) of the domestic oil market. The U.S. Energy Information Administration reported in mid-April that North Dakota’s Bakken shale production will decline 57,000 barrels a day in May. That sort of volume may be small in the grand scheme of oil production – especially with Saudi production at an all-time high – but it is no small amount.
Oil companies operate with long horizon views and will not chase the market unnecessarily. Industry estimates say that there are 2,500 to 3,500 drilled but unfinished wells in the United States. Typical well costs run $4-6 million dollars. Oil prices at press-time are hovering around $55 per barrel. That sort of money will understandably delay plans for adding production in the short term.
This slowdown in domestic oil production and adding further production has lessened activity in the market for board road, crane/dragline mats. The pullback in this market certainly took a lot of strain out of under-supplied low-grade hardwood markets. Recently, there has been a modest upturn in mat stock production, but the current impact on the market is less burdensome.
Low-grade Hardwood and Pallet Prices
It is early spring. There isn’t a glut of low-grade hardwood on the market, but there’s better availability than we have seen in close to two years. The market doesn’t appear poised for a big correction but if supplies continue to improve we could see some pullback in low-grade hardwood prices. I jokingly tell contacts on the phone that the best thing for the hardwood pallet industry is for cant prices to retreat five dollars. I then add that the worst thing for the hardwood pallet industry is for cant prices to retreat more. The premise is that if cant prices pullback five dollars, then the pallet manufacturer gains some much needed breathing room in his profit margins. Too often however pallet suppliers can become fearful of the impact of larger raw material concessions. This – regrettably – ends with unnecessary pallet price cuts.
The process of moving pallet prices upward is too large of a struggle for the industry. It almost never occurs without the aid of a lumber shortage that drives raw material costs higher. Why shouldn’t we as an industry be able to move prices due to other operating costs rising? Some pallet providers had difficulty keeping their pallet prices in line with the rising raw material costs over the past 18 months. When the market leveled, despite multiple pallet price increases, many found themselves with lower margins than they had when the market began to run. It would be tragic to see anyone lower their pallet price if low-grade hardwood prices retreat.
Too Busy? Check Your Prices
Pallet demand east of the Rockies is solid to strong. Some pallet manufacturers are setting records for units produced. However, there is some unevenness in pallet demand. It seems that the larger the pallet producer, the busier they are. The smaller to medium-sized players have mixed demand levels. Sometimes this is due strictly to the pallet price. Larger pallet operations often have efficiencies that some of their local competitors do not have. In conversations with the companies that are especially busy, they often confess that they are not happy with their pallet prices. There may be a correlation.
So You Need Some Cores?
New pallet manufacturers are busy. One trend that has resurfaced lately is pallet buyers who have been purchasing recycled pallets are returning from the recycled pallet market back to the world of new pallets. Sometimes it is for company-specific reasons such as assured cleanliness, or for the sake of not interrupting their automated handling systems. The main reason however is the recycled pallet industry’s inability to keep up with demand due to the lack of repairable pallet cores.
The current trend is a good news/bad news scenario for pallet recyclers. The bad news is customers going to new pallets. The good news is that a lot of the current upturn in the new pallet market is based on good quality GMA pallets. The recycled pallet market can use any infusion of pallets that the new pallet market can provide.
(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.)
