Amelia Island, Florida—I had the privilege of addressing the Materials Handling Committee at the Southern Forest Products Association’s annual meeting, held in Amelia Island, Florida on September 26-28, 1999. In preparing my remarks, I focused specifically on changes in the use of Southern Yellow Pine (SYP) in pallets and how Chep’s market growth is influencing the growth of SYP in pallet construction.
Worldwide Softwood Trends
While the distribution world is constantly shrinking, worldwide many pallet companies continue to function within relatively limited geographic regions. But the trend of thinking outside of a local business region has surfaced and continues to show promise. Therefore, a growing number of pallet people are watching the pallet industry over an enlarged region, sometimes even worldwide.
Pallets are typically manufactured from the wood species that are most readily available in a region. If lumber is available in a rough form from local or regional sources, many pallet companies manufacture some or all of their pallet stock. If material has to be shipped long distances, then buying cut-to-size pallet stock often makes more sense because freight is not being paid on scrap fiber. The duty structure on imported material, such as that on Canadian softwoods moving into the U.S., may favor exporting precut material.
The local/regional nature of lumber supplies has favored the development of softwood pallets in Europe and a mixture of hardwoods and softwoods in North America. The eastern portion of the U.S. and Canada relies heavily on local hardwoods that are available at competitive prices. But the western part of the continent, both the northern and southern regions of the U.S., and parts of eastern Canada utilize large volumes of softwood. Buyers who have to ship lumber considerable distances often rely heavily on softwoods. For example, California buys heavily from the Northwest and Western Canada, and many European countries import softwoods from South America, Portugal, Russia, and Eastern European countries.
Historically our industry has bought lower grades of lumber to manufacture pallets and containers. This may involve cutting pallet stock out of such rough sources as cants and lower grade side-boards, particularly in hardwoods. Softwoods are often finished and sometimes dried prior to sorting out different grades. The lowest grades frequently find themselves on a pallet yard, where they are remanufactured into pallet stock. Because pallets can use smaller pieces than many lumber products, it is possible to reman around defects and upgrade part of the product, resulting into two or more pallet grades – a good one and a poor one (sometimes very poor).
In fact, the most common method of remaning softwood cut stock had been to select-cut and upgrade #4 material (often called economy grade). Pallet manufacturers will buy #3 (utility grade) as well when it gets close enough to #4 in price. Utility provides a better product mix if it can be economically justified.
During the 1990s a significant change took place in the SYP pallet market. Chep entered the U.S. with its rental pallet that contains mostly SYP. But the Chep specification is very strict. In fact, the Chep Mark 55 block pallet is one of the highest quality pallet specifications of any high volume pallet produced in the world. It contains almost 34 bd.ft. of high grade SYP. This opened the door to the potential to buy #2 and cut it to the desired lengths for Chep cut stock. Although a relatively small percentage of the material will still not meet the Chep grade when #2 is processed this way, it is a straightforward way of automating the process of cutting Chep SYP stock.
Thus, some pallet manufacturers and cut stock suppliers who specialize in Chep material buy #2 as a standard practice. The grade numbers available from a recent SYP study do not completely reflect this trend, but comments from within the industry do.
On the other hand, remanufacturers who have a stable market for lower grade softwood cut stock (often used in one-trip pallets) may find it more economical to buy #4, #3, or a mixture of the two for remanufacturing into a mixture of Chep stock and lower grade stock.
Quotas have certainly had an impact on some pallet lumber markets. In Western North America, very little Spruce-Pine-Fir (SPF) is now shipped across the border in random length form because suppliers do not want to use their quota allotments on lower priced material. Cut-to-size material can be shipped across the border quota-free if it is packaged in what is known as pallet kits that contain the quantity of material needed to produce a certain number of pallets.
Import restrictions have been placed on lumber because of insect concerns, such as the recent Asian Beetle scare on packaging from China. In the U.S. this matter is under investigation; we expect to hear more about where this issue stands next year. Phytosanitary regulations are reaching deeper into the wood with concerns over fungi and molds. Drying wood may well become a practice to overcome some of there objections. This could be a plus when it comes to using softwoods for pallets and boxes that are used in exports as well as importing lumber to manufacture packaging.
As the world continues to shrink, there will be more reason to develop international pallet specifications and shipping practices. This may play well into the hands of softwoods in North America, including SYP. Softwoods tend to be more consistent in weight than hardwoods, which has been one of the factors favoring SYP as a pallet material. Since softwoods are easier to dry, which is a desirable characteristic to prevent exporting pests, fungi, and molds, this factor looks positive for softwoods.
SYP in Pallets and Containers
The Center for Forest Products Marketing and Management at Virginia Tech conducted surveys of pallet industry lumber utilization. Its surveys contain estimates of wood material usage in 1992, 1993, and 1995 in the U.S. pallet and container industry. The Southern Pine Council conducted its own survey in 1997. While the results are not identical, there is a definite agreement that SYP has the largest share of the softwood pallet market (estimates ranging from 40% to 60%).
There was a time when western softwoods would have dominated softwood usage more completely. Douglas Fir has become less significant in the West, while Spruce-Pine-Fir (SPF), mostly from Canada, has grown in market share. In spite of the Canadian quota, a great deal of SPF is coming across the border, particularly as cut stock. Alder grew in popularity in the West during the 1980s and 1990s, giving hardwoods more prominence in the West.
At the same time, SYP has increased in popularity for pallets, particularly in the 1990s, through raw material substitution and the Chep pallet. During the hardwood shortages that came and went through the mid to late 1990s, some pallet manufacturers substituted SYP for hardwoods when possible. This market potential is limited in the future since conventional hardwood pallet markets are not likely to make significant shifts to softwoods unless raw material availability forces the issue. Since the demand for new pallets appears to have leveled out, it is difficult for SYP to realize market growth in pallets as a result of overall pallet growth.
The rapidly growing Chep pallet pool has helped make pallets the number one industrial consumer of SYP lumber. The North American Chep pallet pool contains over 30 million pallets, most of them built in the last half of this decade. The majority of the over one-billion board feet of lumber used to build these pallets has been SYP. Forecasts from within the pool of companies that are servicing Chep’s pallet manufacturing needs suggests that this rental giant may need as many as eight to ten million new Chep pallets over each of the next few years. If this heavy demand materializes, then SYP suppliers can expect to continue seeing a strong demand for their product.
Estimates suggest that over a billion board feet of SYP may be used each year in pallet construction. Because Chep pallets contain close to 35 bd.ft. of lumber each, they are particularly heavy wood consumers. As long as Chep is aggressively building its pool, the SYP industry can expect strong sales into this growth element of the pallet market.
Guesses as to the size of the Chep pool once it approaches maturity range widely. I have heard them from about 50 million or fewer to over 100 million pallets. If the agreement that Chep and Wal-Mart have reached causes a big pull-through conversion to Chep pallets, even the larger number suggested here may end up being conservative.
There are all kinds of estimates about how many Chep pallets are permanently leaking out of the system and how many have to be removed from service. If the pool gets large enough before reaching a maturity of some form, then the amount of SYP needed to build enough pallets to maintain the pool may still be very large. It could even match the levels experienced during strong growth years; it is almost certain to be equivalent to a moderate pool growth year.
Thus, SYP producers should be prepared for continued strong demand from the pallet industry, but do not be surprised at significant fluctuations. One of the bad things about depending too much on Chep as a major customer is that the company has a reputation of being hot and cold. They will push suppliers to manufacture and ship pallets as fast as they can go. Then suddenly company management will turn on a dime and reduce the pallet flow to a trickle. They are a demanding customer who doesn’t seem to mind expecting its suppliers to go above and beyond the normal levels of performance. The demanding aspect of their nature is more of a pallet issue than it is a lumber issue since their pallet suppliers are the ones who have to perform acceptably. However, the hot and cold business climate impacts sawmills as well. Chep has the economic power to be a major force in the pallet industry, particularly pallet rental, so the pallet and sawmill industries will have to work with the company as a major customer for better or for worse.
Regardless of what happens to the overall number of new wooden pallets manufactured each year, SYP appears to be in a fairly good position to maintain its market volumes. Chep is the biggest unknown in the picture. Since Chep’s pallets primarily utilize SYP lumber, the pine market is probably in less risk of damage than the other softwood and hardwood markets.
With the world shrinking, the likelihood of more unit load standardization also plays well into the hands of softwoods, particularly SYP. The supply of SYP is as dependable as lumber supplies can be in today’s rocky environmental waters. SYP has a high strength to weight ratio, and its uniform dry weight is a plus. SYP dries well which makes it desirable from both weight and contamination points of view.
Nothing is certain about tomorrow. There is not likely to be a wholesale shifting away from hardwood toward softwood pallets in North America. As rental pallet markets grow, however, they may embrace softwoods more, particularly SYP. For the reasons outlined above, the pine mills in the Southeast can probably rest easy that they will fare pretty well as long as the wooden pallet industry maintains its current demand structure. Future growth in pallet rental is likely to smile favorably on SYP.
