Market Intelligence, Supply Chain

The Current State of the Pallet Market: Factors, Influences, and Solutions

Nearly every product you see today, no matter where in the world you are, has been transported on a pallet at some point in their journey to the consumer. They are the indispensable backbone of the supply chain, carrying as much as 80% of U.S. commerce overall. The outbreak of COVID-19 brought with it massive demand shifts, resulting both from the sudden necessity of essential goods as well as increased interest in particular markets stemming from stay-at-home orders and work from home practices. To put it simply, the past year has largely destabilized and put massive stress on the pallet industry as a whole. Today, the market faces two serious issues: exorbitantly high pallet prices and shortages in both new and recycled pallets.

Pallet Pricing and Its Influencing Factors

Of all the complications the last year has brought the industry, probably the most damaging has been the elevated pricing of pallets. As e-commerce boomed with the onset of the pandemic, many have struggled to keep their warehouses stocked and, in some cases, have paid as much as $10+ per pallet to do so. This increase can be mostly traced to one predominant cause: the current price of raw materials like lumber and steel, something that has skyrocketed since the pandemic’s beginning.

Lumber

Since March of 2020, the price of lumber has increased by an astounding 233%. And it continues to rise steadily to this day, costing as much as $991 per thousand board feet as of March 2021.[1] While the increase itself seems near unprecedented, its root is a simple matter of supply and demand under the influence of COVID-19. When stay-at-home orders began to take effect and people began working from home in large numbers, two major markets saw a significant rise in demand, the first of these being housing. For many, spending more time at home meant realizing that they needed a new one; despite a declining economy, new housing starts reached their highest in fourteen years in December of 2020.

Meanwhile, many took interest in home improvement, investing money that otherwise may have gone towards leisure activities outside of the home into renovations and do-it-yourself projects. With this, consumers began purchasing lumber themselves in huge volumes.

Both of these industries are major consumers of lumber, construction in particular, and increases in demand within them put heavy strain on mills already struggling with consequences of the pandemic, such as social distancing requirements and reduced workforce. This strain was and continues to be the main drive behind increases in the price of lumber, particularly when compounded with the fact that COVID-19 precautions continue to be necessary, and their associated drawbacks continue to slow production.

Steel

A similar case applies to another important contributor to pallet pricing, the rising cost of nails as a result of increased steel prices. Like lumber, steel has been hit by the surge in demand in home improvement; yet, it also carries the weight of industries consistently consuming at pre-pandemic rates, like construction and automotive. Again, like lumber, steel mills face COVID-19 restrictions that limit the number of workers present at one time, seriously limiting production rates. Further, where manufacturers previously might have the option of importing steel to maintain supply, that the current crisis is global means that mills everywhere are subject to the same struggles. For nails, this has resulted not only in increased prices, but in significantly longer lead times as well, sometimes reaching up to two weeks for a single order. Because of this, manufacturers find themselves needing to carefully preplan orders and buy in larger volumes to ensure supply is maintained.

Projected Trends and Additional Factors

As long as these pricing trends in steel and lumber continue, pallets will naturally be more expensive to buy and manufacture. Fortunately, there is an end in sight, at least in the way of raw material prices. With vaccines currently rolling out, we come closer each day to returning to normal operations, both industrially and economically. As COVID-19 restrictions are lifted and people return to spending less time at home, it is likely that demand in home improvement will begin to drop significantly, thus reducing the industry’s strain on steel and lumber.

That said, there are other factors at play in the pricing of pallets as well. Labor shortages in transportation, warehouses, and distribution centers, which the industry has endured since even before the pandemic, have forced wage increases in order to compete with enhanced unemployment benefits and attract workers. Fuel prices have been consistently on the rise over the last year, particularly in the case of diesel, which has seen an increase of eighty cents per gallon since just October of 2020.

Factors such as these, which impact the price of manufacturing and shipping rather than raw material cost itself, have just as much influence over pallet pricing as does the cost of lumber and steel.

Although those materials may become cheaper and more accessible as we enter midyear, costs in areas such as freighting and labor must equalize before that of pallets will see any significant changes.

Pallet Shortages, New and Recycled

One consequence of high pallet prices, and another significant issue facing the industry today, is pallet shortages. With demand for pallets reaching record highs during the e-commerce boom of 2020 and steadily increasing to this day, limited production capabilities have made it impossible for supply to match. As new pallets are not only fewer in number but more expensive as well, recycled pallets have quickly become a hot commodity.

While this has influenced pallet pricing, with pallet cores now selling for more, its primary effect is simply that the existing supply of recycled pallets is quickly dwindling. And with fewer new pallets being produced and utilized, there are fewer cores available to produce more recycled pallets. Ultimately, this has created a feedback loop which has resulted in a shortage of pallets overall, both new and recycled. Although this trend is currently mostly in effect in the northeast and southeast, it is slowly bleeding into the Midwest and can be expected to continue spreading across the country provided the market does not stabilize soon.

Grappling with Instability

With the continuing boom of e-commerce, ongoing supply and demand fluctuations, expected peak seasons, and pandemic recovery efforts, the pallet market at current is unstable as it struggles under the weight of meeting near unheard-of levels of demand. The challenges this has created may seem insurmountable; yet Prime360 offers a number of services designed to help you navigate these unpredictable circumstances and keep your operations running efficiently, both in performance and cost.

Our best and most comprehensive tool for managing issues from inventory and pallet purchasing to vendor compliance is our total pallet management (TPM) program, which packages our services to help you optimize your supply chain and move towards implementing a sustainable 360° model.

With our repair and reuse program, we assist you in enhancing and expanding your repair capabilities to support extensive repairs onsite, and all pallets are reused to their utmost ability to reduce new pallet purchasing as much as possible. Our pallet optimization program, known as POP, meanwhile looks upstream to ensure that any purchased pallets received from vendors meet your exact quality standards to prevent losses and guarantee long-term reusability.

Beyond this, we can work alongside you to acquire supply in advance, purchase at appropriate times to secure better rates, and devise inventory programs which minimize potential risks. By working with us, you also gain access to our extensive vendor partner network spanning the nation, which allows us to connect you with vendors capable of best serving your needs in areas like rail and truck transportation. And you need not undertake the full TPM program to take advantage of services like these; we work with customers every day to create customized programs that allow them to take what they do need and leave the rest at fair and cost-effective rates.

Though the market may be in a precarious and difficult state, your business need not suffer the consequences with no relief. Contact us today to be consulted on how we can help you weather the storm in the wake of COVID-19 and its secondary effects.

[1] “Lumber PRICE Today | Lumber Spot Price Chart | Live Price of Lumber per Ounce | Markets Insider,” Business Insider (Business Insider), https://markets.businessinsider.com/commodities/lumber-price.

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