Thinking Ahead–Letter from Chaille – Pallets Are Supply Chain Gold
Rising prices and tight supplies have changed the position of pallets in the supply chain from afterthought to critical, limited resource.
By Chaille Brindley, Publisher
Date Posted: 12/1/2021
Strong Demand Creates Precious Commodity
Pallets have always been an invaluable resource in the supply chain. Now they are coming to the forefront.
Pallets used to be the forgotten part of the supply chain. Now they are starting to get national attention. I was just contacted by the Fox Business Channel and the Atlanta Journal-Constitution looking for information on the industry due to tight supply and skyrocketing prices. Various associations in the U.S. agriculture sector issued warnings to members this summer about limited supply and the potential impact on the supply chain.
Sure, everything is running into supply chain challenges right now. But when pallets face supply issues, this shortage makes the delivery of everything else that much harder. The used pallet market is drier than it usually is this time of year. Increasingly, distribution centers and retailers are culling out the best pallets to keep. Many are significantly decreasing the number of cores they are releasing onto the open market. Some recycling experts are concerned that core sources this winter won’t release the usual flow of used pallets onto the market after Christmas. If this happens, the fight over cores could get much worse.
To supplement the lack of used inventory, recyclers are buying more new pallets to supply customers. This is putting some new supply into the system. But the rate of replacement may not be keeping up with the current attrition rate.
In general, the pallet industry just dodged a huge bullet when it comes to the COVID-19 vaccine and testing mandates. The Pallet Profile conducted a survey of 39 major pallet companies in the United States (both manufacturers and recyclers) concluding that a majority could lose at least 25% of their workforce if a vaccine mandate were imposed. The pallet industry is known to employ populations that skew heavily to immigrants, minorities, rural whites and others who are less likely to be vaccinated.
Jason Ortega, vice president of public affairs for the National Wooden Pallet & Container Association, stated, “To put on this vaccine mandate, the labor consequences are going to be quite negative. We have heard from members all across the country that they are worried about the number of employees that will leave if they are required to get a vaccine.”
So, if the federal court challenges fail to stop the vaccine/testing mandates, the industry could see a significant impact on companies with over 100 employees. This could turn a bad labor supply shortage into a nightmare for big pallet producers. Imagine what would happen if the industry lost 25% or more of its workers or more? The impact on the U.S. supply chain could be severe since most consumer products ship on pallets. See the full story on page 70.
The pandemic has done a lot to raise the level of supply chain awareness when it comes to the importance of pallets. Tracie Sanchez, president of Lima Pallet, recently explained, “With COVID, we became more than essential. Our major customers were worried we could not supply, from healthcare to essential foods and products. So, pallets became supply chain gold.”
Concern over pallet supply isn’t just happening in the United States. A group of supermarkets in Australia has convened a taskforce to “fix a shortage of delivery pallets that could impact availability of some goods,” according to Reuters. The supply issues in Australia are tied to limited lumber production, labor shortages and fewer pallets released back onto the market by pallet users.
You may be wonder, “’Why doesn’t the industry just boost production to meet demand with prices rising?” This is easier said than done. The industry is facing a severe labor shortage. Nails are in tight supply, and lumber and used core prices remain elevated. All these factors make it difficult for pallet producers to add shifts. Many companies are trying to strike the right balance between supplying long-term customers and keeping from wearing out employees. The cost of inflation makes everything more expensive from insurance to fuel to rent. As costs rise, the price to finance additional lumber or nail purchases jump as well.
Ongoing consolidation, especially in the recycled market, means that larger players with deep pockets will increasingly control large amounts of the core supply coming from the retail supply chain. It looks like much of that volume won’t be brokered out to the open market like it has been done in the past. So, that means more and more recyclers producing combos to supply customers.
CHEP USA may be able to add more loads/customers if it decides to launch a large plastic pool for Costco and diverts some of those pallets to other customers. But the company may also use that volume to reduce its expenditure on new pallets for a period of time.
Many pallet companies had good profits in 2021. Some are plowing those into more automation to improve efficiency. Others don’t want to risk those profits with the uncertain future in the coming years. So, the ability or incentive to dramatically boost production in the short term just isn’t there.
What does this mean in 2022? Look for a situation where pallets remain in demand. Used pallet prices remain elevated unless the U.S. economy falls sharply. Labor shortages continue to drive up new and recycled pallet prices. Pallet users get accustomed to a new normal where supplies remain tight and having a good relationship with your pallet supplier is as important as ever. Tight supplies have tipped the negotiations into the favor of the pallet supplier for once. If pallets are the new gold of the supply chain, it’s wise to have a good network of sources to ensure that your products keep moving.