Summary
• From January-April production was up 2% on the year.
• The strong krona and high log costs are affecting mills’ profitability.
• Production is too high at present.
• The Middle East and north African markets have generally recovered.
• The UK market is subdued.
Swedish shippers could be justified in thinking that everything has conspired against them in recent months.
High log prices have coincided with the krona strengthening against the pound and the euro, and the political unrest in north Africa and the Middle East affected key markets earlier in the year.
“The advantages that Sweden had for a number of years have gone. The climate in Sweden has changed; it’s much tougher,” said one shipper.
And now there’s the additional complication that production has risen – in the period from January to April it was 5.8 million m³, up 2% on the same period last year, according to Skogsindustrierna – and mills are in a similar position to December last year when they took the decision to cut production.
One company in south Sweden which posted healthy profits in 2010 is expecting negative results this year because of the exchange rate and log price double whammy, and the fact that sawn product prices are not keeping pace.
“Things have changed quite dramatically from last year to this year,” a spokesperson told TTJ. “Since December we’ve lost 7-8% in currency and we have all-time high log prices. And sadly, because of poor demand, we’re not able to push sufficient increases through on timber.”
He said his company had raised prices a few weeks ago but any increase in the third quarter would be more modest than originally anticipated.
“We’ve had people working here for 35 years and they say they’ve never experienced such a difficult situation between raw material prices and sales prices,” he said.
He hoped that log costs would come down another 5%, but that presented the risk that forest owners wouldn’t sell as “they get used to these higher prices”.
Another shipper said the €15-20 hike in raw material prices in June last year was the biggest increase he’d seen in his many years in the business.
And while some think log prices may ease a little, the gap between costs and timber prices is unlikely to change significantly.
“We don’t see the situation changing. Log prices may have eased a little bit but not in line with the price reductions we’ve had to take for sawn timber,” he said.
Mills closed
When it comes to log prices, Sweden is a country of two halves, with costs higher in the south than in the north. This burden has taken its toll in the south, where six mills have closed this year, and they may not be the last.
“Prices will have to rise or log costs will have to reduce because if neither happens, we will see more closures,” said one shipper.
The solution, said several contacts, was to reduce production again. “Production levels in all major countries have been high,” said one. “We’re back to the problem of the autumn in that we’re producing more than the market can consume. In markets worldwide there is a rise in consumption, but production has risen further.”
The political uprisings in north Africa and the Middle East, and the earthquake and tsunami in Japan exacerbated oversupply.
“Most companies probably lost one to two months’ sales to Japan and then again to north Africa and the Middle East. The rest of the market hasn’t been able to take up the production,” said one contact.
Most contacts thought north Africa and the Middle East markets were back to normal but one said Egypt’s redwood consumption was still 35-40% below normal as a lack of government meant public spending was suspended.
Demand from Japan is expected to pick up in the autumn as the rebuilding programme gets under way.
UK market
In the UK, where the market is still subdued, the impact of the exchange rate is felt particularly keenly.
“The very strong krona compared with the pound is having a negative effect on the krona net mill levels,” TTJ was told.
Another shipper said the UK was buying both redwood and whitewood but a fight for sales made business competitive. But like other shippers, he emphasised Sweden’s commitment. “It’s not the most lucrative market, but it’s important,” he said.
One shipper described redwood business in the UK as “brisk”, with the good weather in April having motivated quick shipment in garden products, especially decking.
He said his order book was “reasonable” and there were even shortages in some key joinery dimensions. However, he was keen to emphasise that the company was “not breaking any records” and the shortages were the result of getting stock down to more of a balance.
As for the second half, some producers expect little change in the markets, while others are more hopeful of an improvement later in the year. In the past month the mood has shifted down a gear and, with even central European producers no longer seeking price increases, Swedish mills are feeling less optimistic.
One forecast a slow recovery, while another expected a “tough time”: “I’m not really optimistic because I don’t see overall demand being great enough to absorb all the wood. We need a little bit of a shortage to push price increases through and I don’t see that happening in a big way.”
