The fencing and pallet sectors are facing a ‘boom and bust’ scenario, according to one operator engaged in both lines of business.

But unfortunately for the pallet chain, the boom applies entirely to the fencing sector: many companies in the pallet business are in danger of going bust if current price levels and market conditions persist.

The pallet chain continues to be dogged by oversupply of low-price timber combined with manufacturing capacity oversupply, thereby placing pressure on everyone’s margins. To make matters worse, demand in the UK is said by many operators to be falling short of normal summer levels in several key purchasing sectors. Many pallet manufacturers have made heavy investments in automation in a bid to minimise their unit costs and boost their competitiveness.

However, several leading industry figures contacted this week were talking of more producer casualties if there were no significant upward movement in prices. ‘Something has got to give,’ said one source, who described a recent company liquidation as ‘just the tip of the iceberg’ and who pointed out that suppliers were already beginning to adopt a stricter payment code with some pallet manufacturers.

Price pressure

‘People are going in at any price just to get the order,’ said one source. ‘Customers are shopping around to nail manufacturers to the ground and so we can’t get higher prices for our pallet timber.’ Further pressure was being created, he added, by the increasing number of pallet wood customers beginning to ask for Forest Stewardship Council certified material.

Another contact lamented: ‘People are pinching the business at rock bottom prices and I can’t see anything happening suddenly to change the situation. It must be hard for anybody to make money on supplying and cutting pallet board.’

For their part, timber export packing producers may be enjoying lower price raw material but little benefit can be derived if orders are low. One operator complained this week: ‘We are packing at rates which are cheaper than those of 10 years ago.’

In terms of Europe-wide requirements for new pallets, demand is said to have improved within the past couple of months. The focus of this demand has been on southern European countries including Spain and Italy, although there are also reports of improved offtake from Germany, France and the Benelux countries. Along with the Christmas period, the summer is normally a peak time for pallet sales because of the generally higher level of retail activity. Therefore, new pallet demand on the Continent is expected to remain quite healthy at least until late August or early September.

Timber prices in Europe are described as ‘flat to weakening’, with plenty of volume said to be available. After-effects are still being felt from the wind-blow damage wreaked in western Europe – particularly in France – during the storms of late 1999. This influence is expected to remain at least until the end of this year, according to a European pallet expert.

Reverse on-line auctions

Yet another form of pressure is building on the UK pallet sector at present – the ever-increasing impact of so-called reverse on-line auctions. At the 55th Congress of the European wooden pallet and packaging industry organisation FEFPEB, held in Bordeaux in May (TTJ June 2), fears were expressed that Internet auction organisers may not be conducting sufficient preparatory work in terms of defining pallet specifications and researching the ability of bidders to fulfill product and service requirements.

The UK trade this week acknowledged that on-line auctions were almost certainly ‘here to stay’ but highlighted the same concerns over ability to deliver against contract specification. In light of these fears, FEFPEB recently finalised a ‘Quality Chart’ designed to establish guidelines to ensure future auctions are fair and protect the interests of buyer and seller. According to a senior source in the pallet business, companies had no reasonable means to prevent auctions from taking place and so the next best course of action was to try to ensure that certain standards were maintained, hopefully so as to eliminate those bidders who quoted the lowest price without having any hope of fulfilling the contract.

A principal concern in the trade is that on-line auctions are driving down already depressed pallet prices. Noting comments from a St Gobain spokesperson in Bordeaux that it had saved up to 10% on pallet prices using the auction route, an experienced UK pallet industry figure wondered whether this business had been done at the expense of a loyal supplier who had already been offering an extremely competitive price.

Pallet wood supply

There is an abundance of pallet timber on the international market but the pallet sector could not continue to sustain falling prices for too much longer, according to several contacts. There will come a point when growers will not sell their logs at the price levels available to them and when, as a result, pallet timber will come into short supply.

Another key issue raised at the FEFPEB Congress was the looming introduction of a standard for non-manufactured wood packaging material in response to concerns over the spread of harmful plant pests. Likely to be introduced in either 2002 or 2003, the standard is expected to contain a requirement for all wood packaging involved in the intercontinental movement of goods to be heat treated to 56OC for 30 minutes – although fumigation and other approved measures will exist as alternatives.

And so to the generally brighter news in the UK fencing sector. After a late start to the season, business has gathered a pleasing momentum with comments on the market ranging from ‘reasonable’ to ‘flat out’.

Poor weather late last year and for the early part of 2001 meant reduced fencing activity in domestic gardens and the public sector. However, prolonged improvement in conditions in the early part of the second quarter appears to have released a pent-up demand for fencing materials which, for many in the trade, is showing no signs of abating. The upturn in fencing demand has even led to suggestions of some mills struggling to meet demand, thereby enabling fencing operators with stocks to capitalise more than most on the sudden improvement in the market.

The major garden product retailers reported encouraging sales over the crucial Easter period while some fencing operators are now reporting a workload sufficient to see them through the summer and even into the autumn, although others are still anticipating a levelling off in demand over the next month or so. ‘The weather will be the key to this,’ said one. ‘If it stays good, the demand will probably last.’

In some parts of the country, operators are struggling to find the resources to help them meet the sudden rush of commitments. One fencing company spokesperson highlighted the problem of finding ‘sufficient operators to put the fencing up’, adding that these resource difficulties had been exacerbated by the requirement for National Vocational Qualifications on all Highways Agency work. Many fencing operators had yet to embrace the implications of this new requirement, he added.

At least one fencing product manufacturer reported that ‘labour is still a nightmare to get’ and that, as a result, his company ‘can’t run all our production lines every day’. It was ‘slightly annoying’ that clients who were not allowing his workers on site earlier in the year because of the weather were now ‘screaming at us’ to complete. ‘We are being pulled in all directions and you just can’t win,’ he said.

Kamikaze prices

Fencing demand may have improved in recent weeks and months but price increases are still proving to be a rare commodity. One fencing materials specialist reported early signs of being able to secure a price increase – albeit small – but followed up with the comment: ‘Kamikaze prices are still the norm.’

According to one operator, there is a growing trend towards large fencing manufacturers buying direct from UK and overseas mills and this is also pushing down prices.

On the timber supply front, some surprise has been expressed that, despite the fall in the value of the pound, there had been little evidence of price increases from the strong Baltic competition.

‘When the pound was strong, it gave the Baltic states an advantage,’ said one contact. ‘Now the pound is weaker, it is worrying that the market has not come back to us.’ He speculated that rivals in the Baltics may be concentrating on keeping market share.

Product trends

In terms of product trends, the market is continuing to feel an impact from the plethora of home improvement TV programmes. In the domestic sector, demand continues to move away from the ‘bog standard’ towards heavier duty fencing panels and the more decorative items, such as trellis.

Decking sales appear set for another good year despite predictions from some quarters that the product had reached the peak of its strength. Annual UK sales of commercial and domestic decking amounted to less than £5m only four years ago but, according to a recent estimate, may have spiralled to £75m or more last year. Continued growth in the decking market has again been fuelled by TV programmes, leading homeowners into ever more elaborate and higher value decking structures.

Continuing buoyancy is reported in the environmental and acoustic fencing sector, although there have been some reports of a downturn in demand for fencing adjacent to agricultural land, with the obvious assumption that foot and mouth disease must be at least partly to blame.

With the UK fencing sector reasonably upbeat about immediate business prospects, one industry figure pointed to a possible longer-term competitive threat to some areas of timber fencing. A trend has developed on the Continent towards the use of wire mesh fencing systems and there are signs of these products gaining more ground in the UK. One of their key selling points is ease of maintenance since the panels can be clicked into and out of place.