Summary
• Log costs have risen, pushing up sawn timber selling prices.
• Sterling’s weakness is driving up the cost of imported material.
• There is additional competition from the biomass sector.
• Snow and ice have hampered shipments from northern Europe.
• Chilean exports have diminished following the earthquake.

The UK softwood market has changed beyond all recognition during the first quarter of 2010, according to agents and importers. Prices are rising at an unprecedented rate, and this is happening in the face of weak demand.

There are several factors driving prices higher. On a global basis, log costs have been rising, and these in turn have pushed up the selling prices of sawn material. Due to a general reduction in sawmill capacity, supplies have become limited, and there are acute shortages in both redwood and whitewood specifications. Buyers in many of the importing countries are more focused on getting supplies rather than holding out in the hope that increased production will bring price reductions.

As far as the UK is concerned, sterling’s continuing weakness against other currencies is a further major factor that is driving up the cost of imported material.

Other markets such as North Africa that are paying higher prices are attracting large volumes away from the UK market, encouraging shippers to maintain a bullish stance.

This upward momentum on price is forecast to continue at least until June, and seems to be completely unaffected by the underlying weakness in demand. In fact, shippers are saying that if any major market were to strengthen, then supplies would become stretched to the limit.

While there are sawmills that could increase volumes, and mills that have been mothballed that could re-open, unstable log supplies and rising costs are strong factors in dissuading them that a worthwhile return could be made against the commitment of the required expenditure.

In spite of today’s price level, which has in many cases climbed over 30% since last October, the mills are not gaining much in the way of extra profits when increased raw material costs and running expenses are taken into account.

Forest owners reap benefits

According to sources in the industry, forest owners are reaping most of the benefits from current market conditions, and there is added pressure from the wood-fuel industry which is in competition for raw fibre to make wood pellets. This relatively new industry needs huge volumes of biomass, and is likely to continue affecting the future manufacturing cost of fibreboard and particleboard. At the same time, softwood processors will also find this additional competition from biomass pushing up costs when they are buying logs.

The current rise in softwood prices has affected both redwood and whitewood, leaving many UK importers almost ‘dazed’ by the rapid momentum. Timber merchants are still enjoying some cushioning from the full replacement cost as terminal operators have been selling competitively in order to maintain turnover.

As part of the softwood price rise is attributed to sterling’s weakness, merchants have been changing over from buying imported carcassing to home-grown material. This move has given the British mills a huge boost, and several report that softwood production times have become extended up to six weeks. One producer commented, “we don’t need to call the customers, the wood is selling itself”.

The gap between home-grown and imported whitewood currently stands at around £30/m³, but in line with north European log markets, UK and Irish fibre prices are also rising and the increments will be reflected in selling prices on a regular month-by-month basis.

There are delays in shipments from northern European producers as a result of one of the coldest winters experienced in the last 40 years. Freezing temperatures have left ports such as Riga covered in snow with ice hampering shipping movements.

Nordic mills have been forced to reduce production in some areas because their stockyards have been snow-bound, preventing the use of handling equipment. Heavy snow in the forests has also slowed down harvesting operations, but the situation should improve over the next few weeks providing there is not a quick thaw that could cause flooding.

The extremes of weather have caused delays in the system, affecting logging, sawing and logistics. It will take several months before the mills catch up, and the backlog of deliveries reaches the importers’ yards. This factor in itself will add to shortages during the second quarter.

Due to weak demand, the UK market is working on a short buying cycle with merchants ordering on a just-in-time basis, but this strategy is reliant on stock levels at quayside terminals and importers’ yards. Sawmill inventories are lower than normally seen at this time of year, and few exporters are prepared to agree contracts for shipment much further ahead than the end of April. The reason for this is a genuine concern that if they try to sell too far ahead, then further log costs could wipe out any selling margin they had hoped to make.

Several agents have commented that the landed wholesale price of Swedish regularised carcassing for April shipment, not already agreed, will start at levels over SKr2,200/m³ FOM, and May shipments will carry a further SKr110/m³ on top, but this further increase may be higher.

One agent reported that current stock levels in Japan have dropped too far, and some Japanese buyers have indicated they are prepared to pay much higher premiums to get the specs they need. He said that if necessary, there was a willingness to pay up to €75/m³ higher than current market levels to secure supply.

Chilean post-quake exports fall

The earthquake in Chile is already having an additional impact on some markets as the export of Chilean radiata pine inall grades is under question for the foreseeable future. There is an understandable priority that material originally destined for export will be needed in the Chilean domestic market for reconstruction purposes in the rebuilding of the country’s civil infrastructure.

As a result of predicted shortages, prices of moulding grade material and MDF second fix profiles have already surged by more than 25% in the US, and buyers in North Africa and the Middle East who have traditionally imported Chilean radiata pine are making enquiries with European mills for alternative products. A higher demand for packing grades from these countries could cause a shortage of narrow boards in 6th & 7th grades across Sweden, Germany and the Baltic states.

The current backdrop to the softwood market is one of reduced supply and low demand. Other markets outside the UK and western Europe are showing signs that demand will improve in the second quarter, and their buyers are more concerned with establishing strong supply lines rather than quibbling over prices.

As current UK stocks begin to run lower, the trade will need to acclimatise itself to increased replacement costs. In previous years, price increases have been followed on too many occasions by upturns in production and subsequent gluts that have undermined stock values. But in the current climate, if UK buyers hold back for too long, they may find that shippers have already sold out.