Where is the wooden pallet industry now, and what’s next? Chaille Brindley recently dove into crucial economic indicators and how their ebb and flow can influence the pallet industry in the June WPA webinar. The title of his presentation was Ripple Effects: Exploring Economic Indicators Impacting the Pallet Industry, and it was must-watch viewing. This article originally appeared in the June issue of Western Pallet Magazine.
Brindley, the editor and publisher of Pallet Enterprise magazine plus Pallet Profile Weekly and Recycle Record market reports, looked at various factors influencing the pallet industry, including trucking, housing activity, consumer spending, and more.
The current state of the pallet industry
Brindley took attendees for a brief walk down memory lane. In March or April of 2020, the economic indicators were bleak. “It looked like the whole ship was ready to go down,” he said. But it didn’t. “Consumers opened up their pocketbooks and that unleashed a two year period in our industry that was unprecedented,” he said. “I would call it the Roaring 20s for the pallet industry, so to speak.” He called it the best two years in the history of the pallet industry.
Fast forward to the summer of 2022, and pallet companies were still in the driver’s seat “in a way they had never been before.” They could still pass along cost increases to customers and hold profit margins. In the second half of the year, demand started to fall.
Many pallet suppliers initially welcomed the lull after running flat out for that two-year period, but the market continued to soften. Now, Brindley commented, pallet buyers are back in the driver’s seat, as they have been for most of the industry’s history. Industrial Reporting is hearing from pallet suppliers that their sales are down from 10% – 30%.
An online poll of attendees at the event was also taken, with 61 responses. One question asked what has happened to pallet demand for the respondent’s pallet company business and their local market over the past six months. Not surprisingly, 80% of businesses said that pallet demand was down. For 50% of respondents, pallet demand was down more than 10%.
The overall survey results were as follows:
- Gone down 10% or less: 30%
- Down 11-25% 34%
- Down 26-39% 11%
- Down 40% or more 5%
- Flat 10%
- Up moderately 8%
- Up more than 10% 2%
Brindley noted that pallet core prices have probably crashed the heaviest on the West Coast, the region that previously saw the fastest and highest price gains. Now, he noted, core prices have dropped to the $3-$4 range and, in some cases, lower. Also, recyclers are becoming more selective about the quality of cores they will accept. Demand for premium recycled pallets is still steady, but not for lower grades. “Demand for number ones and club grade pallets still is pretty good,’ he said. “One of the reasons for that is that those pallets can be used to replace more expensive new pallets.”
Transportation will be slow to improve
Brindley commented that pallet industry demand typically lags the freight market by anywhere from three to six months. Experts have identified the freight industry as being in a recession by the third or fourth quarter of 2022, so it is not surprising to see what has happened to the demand for
pallets. Experts believe that we have hit the bottom of the freight cycle but that the recovery will be slow. He quoted Craig Fuller from the State of Freight podcast, who said, “My view is that we will look into next year, and we will see some signs of recovery just in terms of very small marginal levels of recovery. But it is probably going to feel pretty flat for a while.”
Consumer spending still strong
Two-thirds of the US economy is connected to consumer spending, Brindley said, remarking that consumer sales have remained strong, surprising experts. He cited motor vehicles and building materials as stronger pockets of demand. With consumers still buying, he questioned how long they can do that in the face of increasing consumer debt, inflation, higher interest rates, and other headwinds. This year’s holiday season spending bump is expected to be smaller than normal.
New home construction
One bright spot in the economy has been new home construction. Housing starts in May 2023 were the strongest since April 2022, with the highest monthly gain since October 2016. The lack of existing homes on the market has buoyed the strength of the new home market.
Meanwhile, the NAHB/Wells Fargo Index has also shown an uptick at 55 points in June 2023. It is the highest level since July 2022, supported by increased builder confidence, attributed to solid demand, lack of existing inventory and improved supply chain efficiency.
Doug Duncan, vice president and chief economist at Fannie May, expects the strength of the housing market to soften the recession and aid in recovery in 2024.
“Overall, the labor market continues to be solid but higher claims do foreshadow potential cooling off in the labor market moving forward,” he said, remarking that pallet companies are reporting that it has been a little bit easier to find people. One of the key issues will be how to retain key employees during the downturn.
Pallet industry outlook
The webinar also included a poll question about when attendees anticipated a recovery. While 39% of respondents anticipate recovery later this year, the other 61% do not expect things to improve until 2024 or beyond. Those responses somewhat mirror the opinions of economic prognosticators who are projecting recovery until next year. They are shown below:
- 3Q 2023 – 16%
- 4Q 2023 – 23%
- 1H 2024 – 36%
- 2H 2024 – 14%
- 2025 & beyond – 12%
The final poll questions pertained to changing pallet buyer behavior. The leading trend reported was increased RFQs, followed by more last-minute purchases.
Implications for the pallet industry
Brindley discussed several implications that the current economy is having on the pallet industry. These included:
– Increased competition, aggressive sales, and price cutting
– No major seasonal holiday bump this year
– Core buyers will be more selective about the core quality they will accept from core emitters.
– Markets for poor-quality pallets will be very soft.
– Lower margins could impact the viability of newer pallet brokers in the market.
– Pressured pallet providers will need to find new opportunities to cut costs.
– Downtime presents an excellent opportunity to work on systems, automation, OSHA programs, and more.
– M&A activity has slowed and will continue to be slower as players become more strategic about further acquisitions.
– Data is critical to knowing costs, managing inventory, and leveraging customer relationships.
Elaborating on data, Brindley stressed its importance to pallet businesses going forward. “Now’s the time to really look at an ERP system,” he said. “What is your inventory? What customers are most profitable? How can you better utilize your people?
“Data is only helpful when you analyze it,” he continued. “And I think what’s getting ready to happen with AI and analytics will blow our minds. So with that being the case, you can’t do that analysis with AI if you don’t have the data. So increasingly, if data is not part of your business plan moving forward as a key differential for your business, it needs to be.
“And the good news is that you’re in an industry that is needed,” Brindley concluded. “If people are moving products, they need pallets.. They may try to get the lowest price they can. But at the end of the day, I think pallets have established themselves as a critical part of supply chain. That’s not going to change.”