Summary
• The value of coniferous standing timber has risen 70% in five years.
• There is a forecast decline in wood supply from the 2020s.
• Some UK sawmills have invested in added-value finishing.
• Timber frame is a target market for sawmills.

The economic outlook appears bleak following the Office of Budget Responsibility’s announcement that the UK has experienced a double dip recession. However, UK timber businesses are bucking the trend, delivering everything that government wants – a low-carbon and rebalanced economy based on growth in manufacturing. Most UK sawmills have strong order books and are running at full capacity, while wood panels have benefited from exports.

The key to this is the euro exchange rate. Over the last four years it has been at historically low levels against sterling, handing a competitive advantage to domestic producers, further aided by increasing raw material costs in competitor countries like Sweden, Finland and Latvia. Domestic sawmills are minority players in the market, meaning there is plenty to aim for, although growth will ultimately be limited by raw material supply.

Outside construction the picture is patchy. Pallet manufacturers are suffering from the depressed economy, while fencing mills have benefited from a strong farming sector and the January storms.

Increasing confidence

Looking upstream, confidence in wood production is increasing; a welcome reversal of a long-term trend. According to Forestry Commissionindices, the value of coniferous standing timber has risen 70% in five years. A major factor is the robustness of sawmilling: home-grown sawn timber has grown to around 40% of the UK market, which Confor has valued at about £1bn a year in displaced imports. Wood energy has trebled to consume 15% of supply in the last four years.

Increased demand provides a market for the still-rising softwood resource – driven by maturing 20th century plantations – and offers scope to harvest more of the hardwood resource in unmanaged woodland. Hardwoods account for 44% of the UK’s resource, predominantly located in England and in private hands. Consumption of domestic hardwoods has fallen by 65% in 10 years compared with an increase of 20% in softwoods. Mills take 10 million green tonnes (MGT), with 9.5MGT of that softwood.

The recent National Forest Inventory indicates a greater softwood resource in the UK than previously estimated. However, a decline in wood supply is still forecast from the 2020s. This is an issue of real concern as the UK’s softwood resource is being reduced for “environmental reasons” and overall demand is set to run ahead of supply.

Looking ahead the picture is uncertain. Years of depressed construction activity mean significant pent-up demand, but will sterling strengthen before growth returns and how will rising input costs squeeze margins for the mills?

Downgraded growth forecasts for the eurozone and the response to elections in France and Greece highlight the fragility of the euro and a further increase in sterling may reduce the competitiveness of UK products. As a spokesperson from timber harvesting and marketing company Euroforest has pointed out: “To ensure we continue to compete there needs to be a weak pound. If sterling strengthens, things can get progressively more difficult. The shades of grey start appearing when sterling rises to €1.25 to the pound. If it reaches around €1.35 then it could be at a tipping point with consequences for the domestic sector.”

Some UK sawmills have invested in added-value finishing so that competition with imports is not just about cost, and many mills have felt confident enough to reinvest in the business. And in the board sector, Egger recently announced a £30m investment on top of £42m over the last three years in its site at Hexham, making its factory the most advanced chipboard plant in Europe.

Investment ability

This investment does raise interesting questions. “It is more consolidation of the market by those businesses with the ability to funnel investment and take advantage of the projected growth in the availability of domestic timber,” said one prominent sawmiller. “This does imply that those companies not able to compete with this investment may be squeezed by big players on one side and the threat of cheaper imports in the future.”

The impact of rising timber prices in the UK is being felt in some quarters. “Although UK mills are busy, they are struggling to deal with the prices for sawn timber and still make a decent margin,” a forest manager remarked. Inflation remains stubbornly high and fuel prices are defying the weakness of much of the global economy. This is putting real pressure on the timber harvesting and haulage sectors in particular.

The domestic market for sawn products is estimated to be worth £2.61bn at the primary point of entry to the supply chain and this is expected to grow as the UK economy recovers. Timber frame is a target market for sawmills that have sought to improve their finished products and add value. A report by MTW Research forecasts that, by 2016, timber frame sales will have grown by 60% in volume and 80% in value.

Interest continues in emerging markets, such as cross-laminated timber, although, in the short term, mills look set to focus on delivering quality traditional products – with James Jones investing in incising equipment for the treated spruce fencepost market, for example.

Turning to future wood supply, substantial challenges remain. Afforestation targets are not being met in Scotland, where there is little softwood planting. Planting is also depressed elsewhere, although continued lobbying by Confor has resulted in a willingness to support new conifer planting in England. The difficulty is finding the funding to support planting and, in Scotland especially, more effective grant and regulatory mechanisms.

A major unknown is the future impact of the energy market and how much supply can be extracted from previously untapped sources, including under-managed hardwoods – perhaps 48% of English Woodlands.

Estimates vary, but the UK government’s plans for biomass energy for 2020 are predicated on domestic supply of between 12 and 17MGT. While this includes waste and agricultural products, a significant element would come from the forest.

Originally, this biomass market was to be driven by new, dedicated electricity plants, but attention has now turned to co-firing with coal and conversion of existing coal plant. These are seen as cheaper energy sources that can be ‘switched on’ prior to 2020 and which will then reduce as new nuclear and other renewables come on stream.

Current DECC estimates focus on simple numbers and pay little heed to practicalities. While under-managed woodland may yield an annual 2MGT or more, it is expected that large plants would prefer to secure the existing supply chains of mills, rather than rely on the aggregation of hundreds or thousands of small woodlands. This latter resource is better suited to local wood-heat installations driven by the Renewable Heat Incentive where it can complement existing wood users, though DECC’s predictions for the growth of this market (over 6MGT) seem fanciful given the very real limitations of boiler equipment and qualified installers.

Pests and diseases

Concerns over future supply are exacerbated by the rise in pests and diseases. Phytophthora ramorum and Dothistroma needle blight are two of the most serious, affecting larch and pine respectively. The former has spread less slowly than feared, although investigations in Scotland are ongoing, while the pine-affected area is greater than had been thought and its impact is both quick and disastrous, destroying the commercial value of the tree.

Spruce, which underpins much of the industry, has escaped lightly so far, but forest owners are increasingly considering how to balance commercial viability and risk when choosing species. The work of the Forestry Commission and Forest Research is invaluable, but is threatened by budget cuts and amalgamation with other public bodies. Wales is creating a single body incorporating FC Wales, Environment Agency Wales and Countryside Council Wales. In England the Independent Panel on Forestry is due to report on July 4.

Confor has worked across governments and Whitehall to press for action to grow the market for wood products and to increase wood supply. One Confor initiative was a paper explaining how forestry can be an engine of rural economic growth in England, with the potential to deliver 8,000 jobs. It would be hugely frustrating if governments indulged in shuffling civil service posts, while the opportunity of economic growth was left unrealised and the threat of pests and disease left unchallenged.

A strong future can be foreseen for the UK forestry and wood processing sector, but much will depend on the decisions made by government on energy policy and supporting future wood supply, as well as how quickly the UK and European economies recover.