Summary
• The storms in January kick-started the fencing season.
• Log prices remain very high.
• Demand for sawn timber is strong across all product ranges.
• Mills have increased production levels but are keeping stocks trim.
• Plant health issues are continuing to cause concern.

The British-grown timber sector exited 2011 with the usual anxieties of what the new year would bring in terms of demand and, particularly weather, with the memory of two harsh winters fresh in their minds.

But they entered 2012 with a spring in their step and, ironically, it was once again down to the weather. Storms whipped through the UK in the first week of January, leaving huge demand for fencing in their wake.

This welcome – and unexpected – surge in demand has created a feel-good factor that has carried through the first quarter of 2012 and that has extended beyond fencing and into other product ranges.

“Just before we finished at Christmas we were all full of gloom and doom about the first quarter of 2012 but the storms put everyone in the right frame of mind and we’ve all been in that positive frame of mind ever since,” said a fencing sawmiller.

Log demand

It’s resulted in greater demand for logs and, while there are no shortages to speak of, competition for raw material is helping to keep prices uncomfortably high – around 30% higher than at the time of the last British timber report.

With production levels and demand increasing at the larger mills, the smaller ones are finding they’re coming up against the big boys when it comes log purchasing.

“We’ve got two or three major players who haven’t pulled logs from our area in the past but are starting to now,” said the fencing specialist. “They’re prepared to pay the prices because they are very much allied to the construction industry and the prices there are [relatively] healthy.”

And, he added, sellers are confident they can get the prices they want. So confident that if the reserve price isn’t met at a log auction, the lot is held in reserve for the next tender. “Under normal circumstances you’d get something, or you’d get the opportunity to negotiate, but that isn’t happening.”

“Overall we’re finding the logs that we want but we’re being very careful about what and how far forward we buy because of the expense,” said a major sawmiller.

One benefit of high log prices, of course, is that the private growers are still very much in the game, with supply in some areas being an equal split between public and private estates.

Passing on price increases

The processing sector is finding it hard – although not impossible – to pass some of these high prices through to their customers, making it “quite a difficult time in terms of the supply chain”.

“We’re not really able to force the log prices down and if we vigorously step up production the log prices immediately jump up, so we have to adopt a very cautious and balanced approach,” said a sawmiller. “There’s no point in us achieving gains on the selling price and throwing them away on the roundwood price.”

Another said that, on the back of strong fencing demand, he’d had some success pushing prices up for the first quarter but that a second price rise had been rebuffed.

As mentioned, demand for fencing took off like a rocket in January and other product ranges seem to have been caught in the slipstream.

“Demand in January, February and March has been fantastic and our despatches are up 20-25% for each of those months,” said a sawmiller. “It’s right across the board of product ranges. Our existing customers are buying more and we’re winning additional business.”

In fact, demand has been “barrelling along” to such a degree that some of the major mills have gone back to double shifts and at least one fencing sawmill put an extra day into the production schedule immediately after Christmas – three months ahead of the predictable Easter demand that would normally lead to this course of action.

Another said his company was “pretty much sold out” and that stock levels of both raw material and finished product were very low. “A driver for that is cash management but we’re also being a bit more selective about what and when we make.”

“We’re virtually producing to order and have very little that is unsold and in stock,” said another contact.

Import substitution

Despite the bumper business levels the consensus seems to be that the underlying demand isn’t really there – and that import substitution is still buoying up the domestic processing sector.

“There’s probably still a £30/m³ gap between British and Swedish timber so that has to be a strong influence,” said a contact, adding that his company was about to win business that would displace two importers.

“Much of the trading last year was short-term hand-to-mouth and this is likely to continue throughout this year, playing to the strengths of UK producers,” said a UK Forest Products Association spokesperson. “UK market share has grown to around 40% which is astonishing – but sadly the market isn’t growing and the gains are being made by import substitution.”

The long-held fear that the price differential advantage could be wiped out virtually overnight by a sudden currency value fluctuation may have abated somewhat. “Exporters to the UK are clearly looking to other markets such as other parts of Europe, the Middle East, north Africa and Asia in the expectation of better timber prices, so that is diverting their attention,” said a Confor spokesperson. “I think there is a little more confidence now that we’re in a more robust position than we’d previously thought.”

“Our mid- to long-term forecasts are that the exchange rate will remain relatively stable, so it’s going to be very difficult for importers,” said a sawmiller.

Export opportunities

He added that there was now potential for exports. “We’re building credibility in other markets so that we’re not just at the behest of the UK market,” he said.

Indeed, British timber is being future-proofed against the vagaries of import substitution with serious investment in quality across the board, from fencing, with an increasing focus on treatment technologies, to carcassing timber.

“At one time you couldn’t sell a piece of home-grown CLS but now it’s a different story and there’s massive demand for it,” said a contact.

The one slightly damp squib in the sector is pallets and packaging. “It’s probably the one sector of our industry that is lagging behind a little bit,” said a specialist sawmiller. “Our regular customers are still taking the volumes in but it hasn’t kicked in to the degree that fencing and construction has this year.”

Despite that, mills have managed to push some price rises through – although met with more resistance than in other product sectors.

“The overall level of demand for pallet wood justifies it,” said a contact, adding that he had some sympathy for pallet and packaging manufacturers. “End users still see pallets as an inconvenient cost, which is a shame given the investments some manufacturers have made.”

One processor speculated that the demand for pallet wood had more to do with competition for the raw material than a pull-through from the manufacturing sector.

Used for a higher purpose

Small logs that historically were used for pallet wood were now being converted to a higher purpose, he said. “If I have a 4×4 block I can cut it as two pieces of 4×2, kiln it, plane it, treat it and sell it as carcassing for £60 more than if I sold it as 4×4 pallet wood. That log is permanently lost to the pallet industry.”

Looking ahead, the British timber sector’s collective state of mind ranges from “more confident than I was six months ago”, to “extremely optimistic”.

“We had a fantastic start to the year with our existing customer base and have extra business coming through for Q2, so I can’t be anything but optimistic,” said a contact.

“We have good levels of business being placed and good commitment into July so our customers are obviously confident that the market will sustain through to the summer months,” said another.

“There are some signs of growth in the UK and other key economies, and although there are undoubtedly shocks to come from the eurozone countries they do seem to be just holding it together,” said Confor’s spokesperson. “If they continue to do that then there is a real possibility that the British mills will continue to do well. That will feed back into a healthier forest environment and the whole supply chain will benefit.”

The jury is still out, however, on the impact of the extra public holiday for the Queen’s Jubilee, the European Football Championships and the Olympics.

For some the interruption to production and despatches caused by bank holidays is an irritation – at least one mill is reviewing whether it will shut down production for Easter next year, having just done so “possibly for the last time” this time around.

For others, perhaps more inclined to lateral thinking, the extra leisure time might result in a boost to the drinks industry and a consequent increase in demand for pallets.

Only time will tell.