Summary
¦ Raw material supply is improving.
¦ In the past five years Baltic mills’ production has fallen by 39%.
¦ Latvia is expected to export just under 1.1 million m³ this year.
¦ The weakening euro means Baltic prices could become more competitive.
As Scandinavian mills cope with fiercely increased sawlog costs, Baltic producers report an improvement in raw material supply and stabilising log prices. This is understandable, as demand for sawlogs in the Baltics has fallen due to reduced sawmill production across the region.
Over the past five years, Baltic sawmills’ softwood production has fallen by 39%. In Latvia alone, output has dropped 37% between 2005-2009 to just over 2 million m³, a decline of 1,194,000m³. Softwood exports for the whole region dropped by 58%, and Latvia’s exports dropped from 2,462,000m3 in 2005 to 1,172,000m³ last year, a change of 52%. Estimates for 2010 predict a further decline in Latvian export volumes of 7% to 1,093,000m³.
As sterling has weakened against other currencies, timber merchants have been buying up British sawmills’ production because prices have been considerably lower than imported goods. Although importers have continued to bring in specifications from Sweden, Latvia and Germany, volumes of imported goods are down and those shippers are obtaining better prices and selling larger volumes to other markets.
In spite of the fact that UK demand is still lower than normal, exporters believe that there are gaps to be filled at some point, and buyers will be forced to turn to imported material.
Exchange rates
Currency movement will be a key factor in deciding where the best deals will come from and, with a weakening euro, Baltic prices could become more competitive, yet shippers would be maintaining their euro price level. As TTJ was going to press it was unknown whether the political uncertainty in the UK following the election could generate another fall in sterling – but if the pound can weather the storm, then goods sold in euros will eventually become more attractive.
The Baltic log supply has generally improved, but the situation among Latvian sawmillers remains far from clear. While some producers report improved log supplies, and are finding that costs are enabling them to make consistent profits, others are struggling to balance log costs against selling levels. The rate of increase in raw material in Latvia is currently less than in Sweden, but prices are rising, and will continue to do so through the third quarter, with sawn softwood prices following suit.
Log exports in the round affect the availability of material to local sawmills that bid for supplies. In January, Latvia’s exports of sawlogs rose over 54% against the same time last year, but the revenue from the extra volume only accounted for a rise of just over 38%. These figures tend to confirm an overall increase in availability, and a reduction in the peak costs reached in 2008 and early 2009.
It should be noted that these figures are not confined to coniferous species and include indigenous hardwoods, but they are generally reflective of material availability.
A stronger pound would make the UK seem a better prospect for shippers but, whichever way currency movements go, UK importers will have to pay the same price as other markets to obtain supply. Agents involved with Baltic shippers report that most production offered to the UK has been sold, and the realisation amongst buyers that shortages are likely to continue until at least September has led to an acceptance of price increases.
Confidence lacking
As demand remains uncertain, so confidence is lacking amongst importers, and everyone is keeping volumes to a minimum. This caution is not just confined to the UK market, as many Continental importers are also keeping a tight reign on purchases and are operating on lower stocks than normal.
Traders on the ground in the UK are reporting resistance by end users to the increase in softwood prices. The building industry in particular is reacting to the fact that they can no longer fix prices for much longer than a few months ahead, instead of a whole year.
Competition among merchants for those orders that are circulating is fierce, but it is not a time for the industry to cut margins. As purchasing costs rise, replacements are becoming more expensive, which means that the trade will have to invest more in stock and funding of debtors to maintain sales by volume.
Rises in energy prices and transport are also adding to the costs of stocking timber, and there are very few businesses in the UK that have any further room left to make efficiency savings. To meet the challenges that lie ahead, the trade is going to need a higher level of support and commitment from both credit insurers and the banking sector.
