Summary
• Global log cost of all types rose by 33% over a two-year period.
• Pulp log demand forced through higher volumes of sawlogs in the first half of 2011.
• Latvian shippers expect to increase exports to the UK through 2012.
• The UK is still the largest single market for both Finnish and Swedish softwood.
• Demand from China is forecast to grow a further 8%.
• Russia is likely to reduce or cancel its log export tariff on joining the WTO.
As 2011 comes to a close, softwood shippers are trying to squeeze as much of their inventories out of the door as possible to reduce volumes and get goods invoiced. With all markets in a subdued and cautious mode, sawmills are making a concerted effort to cut back on current and first quarter production.
Faced with the continuing high cost of sawlogs, and the market’s resistance to price rises, many producers are feeling the squeeze, saying that current selling levels of sawn softwood are too low, and they are losing money.
An audit taken this year and published by the UNECE in the Forest Products Annual Market Review shows that global log costs of all types rose by 33% over a two-year period, reaching an all-time high in March 2011. The main reason for this is increased demand for pulp logs and the added factor of competition for wood fibre from the biomass industry. Rising transport and extraction costs are also factors, and when price levels are not yielding optimum returns, woodland owners are more likely to hold back supply.
These influences will continue to plague the sawmilling industry, adding to upward price pressure on logs and a feast or famine supply situation. During this summer, stock levels at some of the larger sawmills in the Nordic region rose higher than anticipated due to increased activity by their pulp and paper divisions.
Pulp log demand rose due to buoyant market conditions in the paper industry during the first half of the year, and sawmills within the integrated forest products groups were obliged to accept and process a higher volume of sawlogs. Now that pulp and paper market conditions have cooled down, the mills are working towards getting stock levels back into balance. Unfortunately, for the independent mills, the excess volumes at the large producers dented the price structure, and there are still some backlogs to work through the system.
In Latvia one source commented that there was going to be a reduction in the volume of sawlogs available next year. The exact figure was not clear but he put forward a guess of between 10-20% lower than 2011 levels. Latvian shippers have increased their exports to the UK this year, and expect this trend to continue through 2012 although total volumes will still remain modest compared to 10 years ago.
Poor logging conditions
Current logging conditions in some parts of Sweden are poor because weather conditions have been too mild and wet for machines to access the forests. If this situation continues then production will be reduced because fibre will become harder to obtain.
The outlook ahead is one of reduced production in Finland and Sweden, some tightening in supply from the Baltic region and a fairly static price structure through the first quarter of next year.
In the redwood market, Finnish exports remained stable for the first nine months, only falling by 0.92%. The single largest buyer of Finnish redwood was Egypt at 460,000m³, although this volume was 17% lower than in 2010. The UK remained the second largest importer of Finnish pine at 299,000m³, a reduction of 7% from 2010.
During the same period, Swedish redwood sales grew by 11.7%, with a rise in exports to the UK of 0.4% to 467,500m³. Egypt remained the largest buyer at 487,600m³ (571,200m³ 2010), down 14.6% from 2010.
Whitewood exports from Finland increased in the first nine months, gaining 11% over the same period in 2010. Germany increased its purchases by 31% to 296,000m³, but France remained the biggest importer of Finnish spruce at 377,000m³.
Exports of Swedish spruce rose by 2.3%, but sales to the UK fell sharply to 307,800m³ (395,400m³ 2010) – a reduction of 22.2%. The greatest proportion of Swedish whitewood used in the UK is for construction timber, and the drop in UK imports can only be linked to the continued state of the house building industry.
Total combined exports of Finnish softwood including planed and processed goods grew by 5%, reaching 4,536,000m³. Total exports to the UK hit 532,000m³, a drop of 4% compared with the nine-month period last year.
Swedish softwood exports reached 8,806,200m³, 1.2% higher than in 2010 (8,704,000m³), and exports to the UK were down by 6% to 1,781,600m³ from the 1,894,600m³ recorded in the first nine months of 2010.
Combining the figures for both redwood and whitewood products, the UK is still the largest single market for both Finnish and Swedish softwood in spite of a rise in consumption by Japan and China.
Factors yet to impact
There are a number of factors yet to impact the softwood market, which will alter the picture from its current perspective. Firstly, the demand from rebuilding in Japan after the devastation caused by the tsunami is expected to kick in and suck a large volume of timber into construction and infrastructure repairs. Secondly, demand from China is forecast to grow by a further 8%, which will lift export volumes from Canada and Russia in both processed timber and sawlogs.
With Russia now on the brink of joining the World Trade Organisation (WTO), the existing tariff on log exports is likely to be considerably reduced or cancelled. This will strengthen demand from buyers in northern Europe and China but could have a negative effect on Russian sawmills.
The Russian government applied levies to the export of logs in the round to encourage the export of processed wood to keep added-value processing inside Russia. It was hoped that this would encourage inward investment by foreign companies from the forest products sector. Under the rules of the WTO, such levies are not acceptable, so in order for Russia to join the organisation the tariffs must go.
The rise in sawlog costs to the Finnish industry was a major blow as the paper and sawmilling sectors relied on Russian fibre to run their operations. If the mills in Finland, Sweden and the Baltic states are able to obtain cheaper supplies from Russia once again, then it might lift the current pressure on internal log supplies and ease prices back to a more competitive level. Conversely, if the Russian forest owners achieve better prices in export markets, then the Russian sawmills will have to pay more for their supplies.
Current softwood buying patterns among European companies are short-term and virtually hand-to-mouth. This will continue into the first quarter until specifications become harder to obtain and then more forward business will emerge, and at this point prices may well start to rise gradually.
Price levels could be set at an earlier stage if momentum in other markets picks up sooner. There is more demand to come from the Middle East, as Iraq will be spreading investment into reconstruction. Libya also has a great deal of growth potential and early contracts between shippers and Libyan companies have already started working their way through, developing some interesting market options for the mills next year.
These markets are trading in stronger currencies than the UK and the Eurozone, so there is the prospect of a better margin for shippers.
Looking forward to 2012, softwood shippers have some cause to adopt a degree of optimism, and making the most of opportunities as they arise will be simply down to a question of timing.
