Summary
¦ Sales in January were above expectations.
¦ Buyers are generally making short-term purchases.
¦ Profit margins on sawn timber are still low.
¦ Producers are confident of increased demand in the second quarter.
¦ Ship owners are concerned that timber loads may not be offloaded in Egypt.
Many UK traders made a good start to 2011, with January sales figures above expectations, and in many cases higher than the same period in 2009. But despite this improvement, traders, and importers in particular, remain resolute in their priority to keep a tight rein on purchases and inventory levels. They are adopting a cautious approach to buying on the forward market, only agreeing contracts on a short-term basis. In some cases, requests have been made for shipments to be delayed.
This situation has given rise to higher demand for landed stock, and is keeping terminal operators ticking over. But competition within the UK market is fierce, and selling prices to merchants and large end users are less than replacement import levels in some cases. Under these conditions, wholesalers’ margins are being squeezed and they are being forced to discount prices to keep volumes up.
Production caution
The hand-to-mouth approach to purchasing by UK importers has suited a number of exporting sawmills, as they are adopting a similar air of caution over production. Sawmills are keeping a tight rein on output and are determined to ensure there are no gluts in the market.
Producers also say that log costs are still too high in relation to the return on sawn timber. At current levels, they complain that margins are too low and losses are being made when selling into the UK.
Although the prices of both redwood and whitewood have fallen back from peak levels seen in the last quarter of 2010, UK buyers still perceive softwood prices to be firm, and even on the high side when demand is taken into consideration.
It is easy to forget that a significant proportion of the current cost of imported goods is inflated by the continued weakness of sterling when measured against both the euro and Swedish krona. This tends to create the impression that shippers’ prices have risen further than they actually have when assessed in pounds.
In spite of currency exchange rates, production cuts and the rising cost of sawlogs, a number of traders have been left baffled by an aggressive stance taken by some of the Swedish groups. Selling at levels below the fourth quarter of last year, this flies in the face of market conditions.
Cheap selling gives rise to suspicion by more sceptical buyers that the sawmilling industry is crying wolf over log costs, and that there is enough profit margin built in to drop the price. After discussions at the Karlstad Conference held in November, buyers had the impression that some Swedish mills enjoyed a successful 2010.
Log prices
The high log prices in northern Europe have, to some extent, been underpinned by the log export tax applied by the Russian government. When this policy is reversed to secure Russia’s entry to the World Trade Organisation, Russian sawlogs should return to competitive levels and this will improve raw material supplies to mills in northern Europe, particularly those in the Baltic states.
The current political situation in north Africa has sent a shockwave up the supply chain, with reports of shipping lines “holding off” outside ports such as Riga for goods destined to the port of Alexandria.
Ship owners are concerned that if they load with timber, then they might not get discharged on arrival. Although goods are being unloaded in Alexandria, there are no guarantees all cargoes will be discharged. Vessels waiting outside loading ports may be sent elsewhere to collect alternative cargoes if the situation is not resolved. As Egypt starts a new path to political change, other countries in the region, including Algeria, are following suit with demonstrations and protests.
This will create problems for exporters if significant softwood volumes remain stuck at the quayside or in their stockyards. Those that have to hold on to stock will face pressure on cash flow, as they will be unable to raise invoices to importers and receive payment for what has been produced.
Political unrest
As concern mounts over the instability in north Africa and the Middle East, producers from northern Europe, including Russia and Sweden, have been looking at other markets to try to offload goods already produced. Some sources confirmed that such offers had circulated in the UK but, due to uncertainty of demand, combined with difficult specifications, there was not a great deal of enthusiasm to buy.
On a wider scale, the global softwood market has been steady, and producers are confident of increased demand in the second quarter. Demand from Asia has been a driving force in Canada as British Columbian exports of both sawlogs and sawn softwood to China increased dramatically through 2010. China’s economic growth is expected to increase by an average of 9% per year over the next five years, with imports of Canadian softwood reaching 4.5 million m³ this year – a volume equivalent to Russian supply in 2010.
Chinese imports are also playing a significant role in the radiata pine market, taking over 400,000m³ from New Zealand. As radiata is used extensively in the production of modified wood for high performance brands in the densified, thermally treated and acetylated sectors, pressure from increasing Chinese demand could create shortages from this region and force up raw material prices.
Economic outlook
The economic outlook in western Europe is relatively positive, but building and construction activity is expected to contract, ultimately affecting softwood demand for carcassing and joinery sales this year. Conversely, demand for pallet and packing case material in the lower grades is increasing because of growing exports of manufactured goods.
At the end of 2010, contacts across the Netherlands, Belgium and France spoke of shippers with higher inventories than usual eagerly looking for business and willing to discuss price. With demand falling in the last quarter, mills were trying to make up for lost volume and conclude contracts for prompt shipments, but importers were only prepared to buy what they needed and nothing more.
As well as the problem of uncertain demand, a number of UK merchants are struggling with cash flow issues. Accentuating the problem, the fallout from the collapse of both the Connaught and Rok building groups in September and November 2010 respectively is still being felt throughout the UK industry.
Significant numbers of suppliers and subcontractors lost money when these companies stopped trading, and the knock-on effect is continuing to be felt by timber suppliers. A number of contacts said that the hardest part of current trading was getting cash in, and although there were orders in the pipeline – in some cases for prestigious contracts – goods could not be released until payments were updated.
During the past six months, after constant representations from the trade, credit insurers have reinstated and improved credit limits within the timber sector, but if the repayment cycle begins to stretch and reports of late payments grow, underwriters may react once again by cutting limits and withdrawing cover.
Optimism
In spite of the difficulties the trade is facing, there is a degree of optimism and a belief that prospects will improve during the second half of 2011 with a recovery in 2012. Agents and importers alike predict that softwood prices will increase from April onwards, only being masked by exchange rates if sterling recovers against the euro and krona. In the meantime, traders will need to hang on by their fingernails to see out the rest of February and March.
