Manufacturers of wooden pallets are struggling to keep up with soaring demand and are being forced to charge their customers more as lumber prices have climbed to record levels during the COVID-19 pandemic. Companies that depend pallets to get their products to market must now absorb high costs and accept lower profit margins. Unless lumber prices moderate, experts warn those growing costs will be passed along to consumers.

The pallet industry sits at the intersection of a troubling Venn diagram: doubly affected by wood scarcity and unpredictable supply-chain needs. Many industry executives say that while their revenue has skyrocketed, they are struggling to remain profitable.

“We’re running flat out. We can’t cut any more lumber; we can’t produce any more product. Our costs are up on every front,” said Shawn Hicks, chief executive officer of CPS Wood Products in Cobourg, Ont., east of Toronto.

Pallets underpin the North American supply chain. Used to help ship products between manufacturers, distribution centres and retail outlets, experts estimate pallets touch 90% of the goods purchased by consumers at some point in the journey from production line to store shelves.

Scott Geffros, general manager of the Canadian Wood Pallet and Container Association, said the main reason for soaring prices is the cost of wood. Lumber prices hit record highs earlier this year as house construction expanded and sawmills hit capacity. While softwood lumber prices have pulled back significantly in recent weeks, Mr. Geffros said, hardwood and aspen markets continue to rise. So far, however, pallet prices and availability remain much the same.

Before the pandemic, CPS’s Mr. Hicks said he spent much of his day talking to customers and looking at sales models. Now, he spends most of his time managing lumber supply. One year ago, he would pay $30,000 for a rail car of lumber. At the peak prices in recent months, that amount soared to $149,000.

“When costs go up that high, it’s hard to stay ahead of it,” said Mr. Hicks, whose company processes three rail cars of lumber a day. Normally, he would have wood supply for up to the next six weeks secured. Now, he’s down to less than two. In a just-in-time supply chain world, even one day late can send ripples down the line.

Pallets are also being tied up in warehouses for longer, contributing to the industry’s shortage, said Lisa Vegso, managing director for Canada of U.S.-based PECO Pallet Inc. After the nightmare of supply shortages early in the pandemic, many companies began stocking up on inventory. Often, these goods remain on pallets until they go to store shelves, essentially taking those pallets off the market for months, said Ms. Vegso.

Shawn Brenn, president of Brenn-B Farms Ltd in Waterdown, Ont., west of Toronto, understands this concern. He relies on pallets to get the potatoes and onions he grows to market before they spoil. The issue, he said, is not just the high prices, it’s the availability of certain types of pallets. Some grocery stores have very specific pallet requirements and those pallets have been even more difficult to find.

The high costs have also squeezed manufacturers of non-food items. Production lines typically depend on pallets to bring in parts from several sources. But car and bicycle manufacturing has often halted during the pandemic because of a shortage of parts coming from China. This leaves manufacturers with no choice but to absorb the high prices of pallets, or risk stalling output. However, the cost doesn’t stay with them, said the wood pallet association’s Mr. Geffros, it is passed down the pipeline to consumers. At each point in the supply chain, a small increase is added to compensate for the price of shipping and packaging.

While it may still be too soon to see the full effect of pallet shortages, some analysts and executives do not expect the price of pallets to normalize for some time. “It’s really hard for supply chains to change quickly when you have a system that was built on just-in-time delivery,” Brent McClendon, president of U.S.-based National Wooden Pallet and Container Association, said. One change he does foresee: greater automation in coming years, as labour shortages continue to worsen.

Unlike pallet manufacturers in Ontario, some in British Columbia are finally starting to lower their prices as lumber prices also drop. PECO Pallet’s Ms. Vegso said her company is waiting for lumber prices to moderate before ramping up its pallet production. Even so, she believes demand will continue to outstrip supply throughout 2021. “The trend is moving in the right direction, and we are seeing prices down from their peaks. We’re starting to see supply begin to recover, but it’s going to take time to catch up,” she said. “We’re all suffering the same challenges, and just doing our best to manage.”

Source: Globe and Mail