By the hardwood lumber report
The US wooden pallet and container industry is far and away the largest domestic or international market for US hardwoods by volume. However, hardwood consumption by the industry steadily contracted from 2014 through 2017, falling a total of 17%. Projections on pallet markets suggest total industry consumption of wood raw materials increased in those years. However, elevated prices and persistent shortages of hardwoods fueled substitution with lower-cost, readily available softwood raw materials.
Many industry observers believe softwood surpassed hardwood as the leading material in pallet construction during that period. As softwood use became more prevalent, supplies of hardwood cants ballooned, and prices – averaged across all eastern hardwood producing regions – slid a total of 16% from the end of 2014 through the first two months of 2017.
The Turning Point
While overall pallet industry consumption of hardwoods declined in 2017, the middle months of the year marked a turning point, during which demand and prices stopped falling, leveled off, and began to climb.
This turnaround resulted from several factors. First, softwood supplies tightened, and prices escalated. The change was due, in part, to the US Department of Commerce’s April 2017 implementation of countervailing (CV) and anti-dumping (AD) duties on Canadian softwood lumber imported to the US. The combined CV/AD rate for most Canadian companies is 20.23% and remains in effect at the time of this writing. Second, hardwood pallet lumber and cant prices were at the lowest levels in several years. Third, US GDP growth accelerated from Q2 2017 onward and finished 2017 at 2.3% compared to 1.5% in 2016. This point is quite important, as growth in the general economy is vital to pallet sector growth because products of all kinds are shipped on pallets. Finally, surging residential construction elevated demand for softwoods and, in general, became a much better market option for softwood sellers than the pallet market.
All told, sales of hardwood pallet lumber and cants were much stronger during the second half of 2017 than during the first half, and cant prices quickly increased.
Challenging Supply Circumstances
For hardwood sawmills, strong pallet lumber and cant business has carried over into 2018 and gained additional momentum through June. The economy continues to expand at a healthy rate, pallet manufacturers report solid year-over-year sales growth, and supply and price circumstances for softwoods have become even more favorable for hardwoods.
At the same time, demand has strengthened from other markets that use raw materials generated from hardwood log centers, particularly the residential flooring, truck trailer flooring, and railroad tie industries. Through mid-year, supplies of all these items were lagging demand, and each market appears to have strong forward momentum. Moreover, unusually wet winter and early spring weather in most hardwood producing regions impacted logging and hardwood sawmill production. According to HMR© estimates, the annualized pace of US hardwood lumber production through the first five months of 2018 was 3% below 2017 production.
Amid these market conditions, hardwood pallet lumber and cant supplies tightened dramatically in most areas during the first half of 2018, and prices responded. On average, hardwood cant prices climbed 12% during the first half of 2018 for a total increase of 26% for the one-year period ending on June 22, 2018. However, pallet manufacturers are still struggling to procure sufficient volumes of cants, even those paying high prices. And, prices continue to show signs of upward pressure.
Meanwhile, prices for US and Canadian softwood lumber continued to climb during the first half of 2018, as evidenced by the Random Lengths Framing Lumber Composite Price and scores of other published Random Lengths lumber prices repeatedly setting all-time highs. US and Canadian officials appear to be making no headway in forging a new softwood lumber agreement, and US duties on Canadian lumber are likely to remain in place until they do.
What Goes Up…
Turning to the future, hardwood raw material availability for the pallet industry is likely to seasonally improve this summer. Log supplies at hardwood sawmills began to rebound in late spring, as did lumber production. Assuming this trend continues, increased pallet lumber and cant receipts will be welcomed by pallet manufacturers, many of which have seen sales limited more by raw material supplies – both hardwood and softwood – than by demand.
That said, it will probably take some time to fully close the gap between supply and demand, especially with tight availability and high prices for softwoods keeping pallet manufacturers more reliant on hardwoods than in recent years. Is the hardwood industry still capable of oversupplying pallet markets when weather and other conditions are right? Absolutely. Will it do so at any time in 2018? It seems doubtful. Therefore, in the near-term, buyers are unlikely to see relief from today’s relatively high hardwood pallet lumber and cant prices.
Looking into Q1 2019 and beyond, the outlook is less clear. The current situation looks similar to the circumstances that eventually triggered the last crash in demand and prices for hardwood pallet materials. Specifically, competition from other markets seeking similar quality material is elevated; supplies are persistently scarce; and prices are quite high from a historic standpoint. Plus, history shows that all the factors influencing pallet industry demand for hardwoods – including economic growth and softwood lumber prices – follow cyclical patterns and are subject to sudden changes.
The pallet industry is tolerating higher raw material prices now because it has little choice, but few markets are as sensitive to raw material costs in the long run. If circumstances change, pallet consumers, and therefore pallet manufacturers, will quickly migrate to the lowest-cost raw material available.
Large swings in demand and prices for hardwoods and softwoods over the last five years would seem to prove that the only constant in the pallet raw material marketplace is change. What goes up almost inevitably comes down. The only question is when.
(Article written and produced for the July-August 2018 edition of PalletCentral)
Hardwood Market Report (HMR) has provided weekly price and market information on North American hardwood lumber and lumber products continually since 1922. Recognized as the authoritative source of data and market analysis, HMR is circulated throughout the world in print and via Internet at www.hmr.com. For more information, email: David Caldwell, Associate Editor; Judd Johnson, Editor; Andy Johnson, Associate Editor.