What is the future of our wood market and what are we going to do going forward?

A frequent contributor, John Shawyer is Director of Associated Pallets

 

Finding enough wood at an economic price to use in an ever increasing variety of pallet shapes and sizes is just one of the challenges facing pallet manufacturers in the coming years.

The problems started with the 2007/8 financial crisis and ensuing recession that caused a sharp reduction in hardwood capacity. Loggers, logging capacity and sawmills were lost. Many are not expected to return to the industry.

At the same time, pinewood producers, who sell the main material for wooden pallets, added some capacity but took their time about it. They also reduced the number of types of lumber available for pallets.

Beetle infestation in some U.S. forests also resulted in sawmills closing for over a decade, placing a further constraint on lumber supplies.

Recession and Chinese Demand

In the background, the market was being shaped by China’s vast urbanisation programme and increasing need for lumber imports. Russia’s lumber exports to China have multiplied eight-fold over the last decade. China has been able to outbid sawmills in the U.S. west coast as the North American construction market was slowly recovering from its recession.

All of these trends have contributed to a reduction in available wood supply for pallets as well as a sharp increase in wood prices. Any further recovery in European economic prospects can add even more to price escalation. Prices would have risen even further were it not for the unusually severe 2013/14 winter in North America that constrained the construction market for a few months.

Beetle Infestation

Despite the beetle infestation that spread over the western U.S. and Canadian forests, many British Columbian forestry companies are gearing up to increase production from sawmills. Nevertheless, the beetle infestation has meant that there has been more investment in sawmills in the south east of the U.S. but even these do no have sufficient logs for processing.

Customer Choice

For wood pallet manufacturers, the problem is that they first have to secure the wood supplies before they can price their products for prospective customers. The customers, for their part, are becoming ever choosier.

Pallet buyers are specifying ever more individual sizes and shapes. The pallet wood has to be much drier than before, as consumers become ever more aware of the contamination possibilities of moist wooden pallets.

The consumer is seeking a smaller pallet size to fit in ever more constrained warehouse space. As many retailers move to the just-in-time version of stock management, their inventory risk is effectively being carried by the pallet manufacturers. Customers are looking for bespoke deals with longer-term contracts. Requests for 120-day terms have become common.

The market for second hand wooden pallets and used wooden pallets in general is contracting. It has not collapsed sufficiently to make plastic pallets a more competitive option for most pallet consumers, but manufacturers remain wary.

Rising Overheads

With increasing material, labour and general running costs, overheads are rising for the pallet manufacturers. They are also having to carry a greater working cash balance in their accounts at a time when many financial experts expect interest rates to start rising again.

The real question is: how can independent pallet manufacturers survive in the future lumber market? The supply chain is very long, starting with loggers who supply sawmills that pass the wood to wood product manufacturers before the remaining produce reaches pallet makers and later the sales teams and general brokers and traders.

Is Integration a Solution?

Every stage in this chain requires expensive equipment and high-cost labour, often in a dangerous working environment where liability insurance costs and limits are also rising. Most pallet manufacturers are small and often family-owned businesses with narrow margins. They are dependant on customer loyalty.

The solution seems to be to create integrated operations with a stronger capital base that embraces the entire supply chain and can keep pallet prices at reasonable levels. The lumber industry and pallet manufacturers in general face some dramatic changes in future.

Speak Your Mind

*