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The Hardwood industry Under Duress

By the hardwood market report

 The U.S. hardwood sawmill industry and the wooden pallet and container industry are highly interconnected.

To be successful, hardwood sawmills require solid markets for industrial products like pallet cants and lumber, railroad ties, board road, and crane mats. This industrial market group accounts for 59 percent of total Eastern U.S. hardwood consumption, according to Hardwood Market Report estimates. Importantly, the pallet and container sector, alone, utilizes 41 percent of all hardwood consumed in the Eastern U.S.

Similarly, the pallet and container industry depends on hardwood to meet about 45 percent of its wood raw material requirements. It would be hard pressed to replace that fiber, particularly for companies in the Northeast and Midwest, which are most reliant on hardwoods.

Unfortunately, diminished economic activity resulting from coronavirus mitigation efforts severely disrupted business for both industries in the last several months. Overall demand for pallets and containers fell sharply, with especially steep drops from market sectors not deemed essential by governments. Many operations experienced sales declines of 50 percent or more almost overnight. For the hardwood industry, the drag on business from the pandemic is the latest in a series of setbacks.

Let’s examine the state of the hardwood sawmill industry, with a particular focus on trends in production that could alter the supply/demand balance for pallet cants and lumber during the remainder of 2020.

Unsettling Times for Hardwood

The last two-and-a-half years have not been kind to the U.S. hardwood industry. Sawmills were reeling before the coronavirus hit and are now in even tougher shape.

First came the sharp decline in demand from China. This resulted from an economic slowdown as well as changing home construction practices whereby Chinese builders rather than homeowners select interior furnishings and fittings. (Chinese home builders – like their U.S. counterparts – tend to migrate away from solid hardwood toward lower-cost materials.)

Then came the trade war with China, during which China imposed import tariffs of up to 25 percent on U.S. hardwood logs and lumber in response to similar measures by the U.S. This not only further reduced exports to China but also pushed down prices, as exporters were compelled to shoulder at least half the tariff costs.

This year, U.S. hardwood exports have declined both to countries hard hit by coronavirus and to countries supplying finished goods to those markets, such as Vietnam. Shipments to Mexico have been doubly impacted by declining U.S. imports of Mexican finished goods and reduced consumption in Mexico as the coronavirus spread there.

What is the net result? U.S. exports of hardwood lumber are on pace to total just 1.180 billion board feet (BBF) in 2020 – down 195 million board feet (MMBF) from last year and 705 MMBF from the record high of 2017. Shipments to China are pacing 558 MMBF lower this year than in 2017, accounting for 79 percent of the total three-year decline.

As exports were faltering, U.S. hardwoods also encountered heavier competition in domestic markets from substitute products and imports. Luxury vinyl tile gained significant market share at the expense of other floor coverings, including hardwood flooring. The popularity of painted cabinets allowed cabinet manufacturers to replace hardwoods with wood composites and other materials in those applications. Imports of wood cabinets spiked. And on it went.

Amid these challenges, consumption by domestic grade lumber markets slid 79 MMBF to 2.143 BBF in 2019. However, business disruptions resulting from the coronavirus have caused grade usage to plummet in 2020. Hardwood Market Report projections anticipate a total decline of 723 MMBF from last year.

Importantly, the latest round of disruptions to grade lumber business was only a part of the pandemic problem for hardwoods; demand from industrial markets was suddenly interrupted. Given all the impacts this pandemic has had on US hardwood trade, one of the most damaging effects has been decreased raw material demand by the wood pallet and container industry.

In 2019, prior to the pandemic, rising demand from the pallet and container industry lifted total industrial market consumption of hardwood by 150 MMBF over the previous year. However, industrial markets are expected to consume 1.101 BBF less hardwood this year than last, with the pallet and container sector accounting for most of the decrease (-953 MMBF).

The Production Response

The broad effect from the downturn in exports, increased competition from other materials, and the pandemic is that less hardwood lumber is needed. Since supply inevitably adjusts to demand, less lumber is being produced. There is an undeniable connection that makes the wood pallet and container industry critical to hardwood lumber production. The ability or inability of sawmills to sell industrial/pallet quality material affects how much total lumber they can produce.

This is evident in production statistics. In 2019, Eastern U.S. hardwood production declined by 588 MMBF, or about 7 percent, as strength in the pallet/container sector and other industrial markets mitigated the impact of declining domestic and international demand for grade lumber. However, since the coronavirus broadly curtailed demand across both grade and industrial markets, most sawmills have slashed production, some have closed, and others are on the brink. The annualized pace of production through July was 6.070 BBF – a 20 percent drop from last year.

Fewer hardwood sawmills are operating now than at this time last year and even at the start of 2020. Advertised sawmill auctions have skyrocketed since the start of spring, signaling more closures are imminent. Some of these facilities will be purchased and put back into service, but not all of them – which is the point. As happened with the Great Recession, all of the headwinds hardwoods have faced the last two years combined with the coronavirus pandemic are reducing U.S. hardwood manufacturing capacity, not just capacity utilization.

Certainly, new capacity can be added. But, that will only happen if the marketplace requires more volume and is willing to provide investors incentives to do so. In the meantime, what happens to supply? One possibility is an overcorrection that drops supply well below demand for a period of time later this year. Hardwood raw material for pallet and container manufacturers is abundant now, but that could change if that possibility becomes reality.

(Article written and produced for the July-August 2020 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 EditorJudd Johnson, EditorAndy Johnson, Associate Editor.