Lisa Vegso, vice-president and managing director, Canada, PECO Pallets, poses for photos at the shipping pallet company's Mississauga, Ont., storage and distribution facility on Dec. 22, 2021.J.P. MOCZULSKI/The Globe and Mail
Fall flooding, new material shortages and the Omicron variant have thrown the once-predictable pallet industry into chaos again, after months of seeming calm following supply chain delays and record-high lumber prices.
With B.C. ports and supply routes out of order following floods in November, transporting lumber and pallets to market has become slow and costly. Lumber prices are again on the rise after a steep drop-off from last summer’s soaring prices, while nail shortages have also pushed costs up and bitten into pallet producers’ profits. Now Omicron has renewed labour shortages as more workers stay home.
“Our industry has been hit from all angles,” said Ryan Scobie, president of Woodbridge Pallet Ltd. in Woodbridge, Ont. “It’s just everywhere. You turn a little bit and you’re getting kicked in the back end.”
Since the start of the pandemic, Canada’s wood pallet producers have struggled under the weight of record demand and production challenges. Shortages of lumber and manufacturing equipment have chipped away at the industry’s bottom line and left pallet companies scrambling to navigate constantly fluctuating prices.
The industry, which included about 500 manufacturing and brokerage companies as of 2020, contributed nearly $1.1-billion to the Canadian economy in 2018.
Pallets are the last leg of the supply chain, allowing forklifts and other equipment to pick up and move large loads of goods. As some of Canadians’ spending shifted from services to goods over the past two years owing to the pandemic, demand for pallets rose accordingly.
In recent months, the disrupted supply chain has left some manufacturers and brokers holding hundreds of pallets in excess and running out of room to store them, while at other times struggling to fill customer orders. Pallet company owners say they are being forced to pass the higher costs on to their customers -- costs which Canadian consumers will ultimately have to pay.
“The challenges and problems seem to be the same whether you’re operating in New Brunswick or Saskatchewan or Ontario,” said Scott Geffros, general manager of the Canadian Wood Pallet and Container Association.
Among the most important factors for the pallet industry is the cost of wood. Prices crashed to just over US$250 per thousand board feet in August from historic levels of US$1,400 in May, according to industry newsletter Madison’s Lumber Reporter. Companies with inventory they paid high prices for had to swallow losses or reduced earnings to sell alongside lower-priced products then entering the market.
Lumber costs are again on the rise, fuelled by infestations of wood-boring beetles, sustained house construction and new U.S. duties, whose costs must be absorbed partly by higher prices in Canada. As of mid-December, prices were back up to US$770 per thousand board foot, half of summer highs but up 46 per cent from November. That is still about 190 per cent higher than typical prices before the pandemic.
Meanwhile, new equipment, including forklifts, saws and basic conveyor belts are taking up to a year to arrive, meaning pallet companies are struggling to adapt to new production rhythms. As a result businesses have had to turn away new business.
“When things are running at capacity already, taking on extra demand is a challenge and costly as it comes at the cost of paying for overtime, contracting out services, and buying higher-priced supplies just to keep up,” Woodbridge’s Mr. Scobie said.
According to Mr. Scobie, port delays and coastal floods in B.C. have added transport costs to already delayed shipments of nails from China. During the fall, the Chinese government shut down manufacturing facilities as a result of coal shortages. Industry leaders say the price of shipments of nails -- an essential part of pallet construction -- have risen from US$2,000 to more than US$17,000 for shipments from Europe and US$22,000 for those from Asia.
The fallout from flooding, including backed-up transportation routes, has meant it is taking longer to ship pallets to their storage facilities, said Lisa Vegso, managing director for Canada of PECO Pallets in Mississauga, a North American pallet lending company. As a pallet pool, PECO charges customers a fee to rent pallets, which are then returned to PECO’s facilities in cities across Canada and typically make their way from the West Coast back to the GTA.
PECO is a large supplier to grocery stores, many of which increased their product orders at the beginning of the pandemic in preparation for increased demand. This meant many pallets which would typically circulate within the supply chain were sitting in warehouses, loaded with product, decreasing supply in the market and pushing up prices.
While grocery demand has now returned to a more regular pattern, Ms. Vegso said, pallet suppliers have seen the need to keep hundreds more pallets in stock at any given time, increasing the requirement for square footage.
“When you have a really tight market for real estate and low inventory, it positions the landlord to be very selective about their tenants,” said Ms. Vegso. “Manufacturing can be a bit of a dirty business. So it can be difficult to find somebody who is willing to have pallets in their facility.”
Meanwhile, insurance rates for damage to pallets, equipment and buildings are increasing. Finding insurance coverage has long been an issue for those working with wooden products, as the risk of fire is high, and fluctuations in lumber prices mean the industry is in constant flux.
According to Mr. Geffros, pallet companies have reported insurance rates increasing by over 150 per cent in the past two years for the same facilities, adding to already costly overhead.
Labour shortages have added to the sector’s predicament. As in many other industries, finding enough workers during the past year has been a challenge, to the point that taking on new business doesn’t warrant the “aggravation of adding staff” according to Mr. Scobie.
Now, a new COVID-19 variant has again raised concerns about labour shortages, as workers face stricter quarantine restrictions in the case of COVID-19 exposure. The reintroduction of emergency benefits could further delay the return of workers, said Mr. Geffros. Programs such as the Canada Emergency Response Benefit this fall have been widely blamed the shortage of workers in some sectors.
“If worker benefits are extended, modified, or increased, it is certain to compound labour issues,” Mr. Geffros said. “I anticipate that this new wave could negate some of the gains made by facilities in growing and stabilizing their workforces throughout the course of the past year.”
Yet despite the new wave of COVID-19 and the challenges that follow, he is remaining positive.
“It will take some time to normalize, but we as Canadians have become quite adept at navigating through these hard times,” Mr. Geffros said. “My thought is that we have merely hit a speed bump on the path to recovery, and not a wall.”