Summary
• Traders are keeping their inventories as low as possible.
• Cargo volumes have plummeted.
• Swedish shippers are hoping exchange rates will give them an advantage in the UK.
• Sawmills in northern Russia are closing or curbing production.
• In the UK, carcassing stocks are more manageable than earlier in the year.
UK softwood traders are facing increasing pressure from all angles as the effects of the global economic downturn bite into every aspect of business.
While costs such as fuel power and environmental compliance have been rising, timber merchants and importers have found themselves being squeezed as sales have continued to follow a downward trend since August, forcing companies to reduce running costs by implementing redundancies and closing some depots.
Softwood purchasing is very much on a hand-to-mouth basis and stockists are keeping their inventories as low as possible and delaying orders for anything that can be put back to the new year. In order to get only what they need, merchants are requesting part trailer loads, and in some cases even pressing suppliers for single packs. This is more costly and less fuel-efficient for softwood wholesalers than planning for normal single-destination loads, and it is causing logistical difficulties for those agreeing to provide such a service.
The downturn in sales, combined with adequate stock levels in the UK, has caused a virtual lack of interest in the forward market, and this has impacted severely on those softwood agents who are not involved with selling from the quayside. Cargo volumes have plummeted, and first quarter contracts are now being conducted in hundreds of cubic metres rather than thousands.
Worst affected
This problem is not confined to the UK, all other European markets are suffering in a similar way, but Britain currently seems to be one of the worst affected.
On the export front, shippers are wringing their hands in dismay as the gap between log costs and selling levels leaves little-to-no room for any margin. In fact, much of the current trade is being done at a loss.
At the Swedish sawmillers’ conference in Karlstad at the end of November, exporters confirmed a worsening situation in terms of global markets, and deteriorating consumption in Sweden as the building and packaging sectors are slowing right down.
The neighbouring market of Denmark is still importing window and joinery sizes to some extent, but furniture manufacturers have become almost inactive. Other Swedish markets in Spain and Italy are struggling economically and softwood purchases are very low. The mass building programme has ground to a halt on the Spanish mainland, leaving thousands of apartments either half finished or empty.
Those who have invested in Spanish holiday homes are witnessing a marked devaluation of property value as competition intensifies among people trying to cash in, and offload their investment.
Although sterling has fallen sharply against the US dollar and euro it has not as yet fallen proportionally so far against the Swedish krona. This has given Swedish shippers some hope that they will be able to retain a competitive edge in the UK market against German whitewood shippers. German sawmills sell to the UK in euros, and still have a dangerously large over-production. Since the collapse in US demand they are looking for any markets that will take softwood.
The same principle applies to competition from Finnish and Baltic shippers who also trade in euros but, as they have cut back on excess production during the year, they are unlikely to ‘dump’ stocks in the market in the same way the Germans have.
Russian mill cutbacks
In Russia, the northern sawmills are either closing down or reducing production in order to stem losses, which, if action is not taken, are likely to run into millions of dollars.
Although Russia’s Middle Eastern markets are still buoyed-up by large construction programmes, landed stocks are relatively high and there is a limit to how many more full cargoes will be required in the near future. Volumes at the port of Alexandria in Egypt are still reported to be very high and, as softwood usage has been slowing down in this region, it is unlikely that much stock will be needed during the first quarter.
In the UK, landed stocks of Russian softwood are slow-moving, and most terminal operators have enough stocks to last them into the first quarter of 2009. However, there are growing gaps in specifications as importers hold back on replacements. Many are turning to the Swedes and Finns for top-ups.
The decision by the Russian government to suspend further export tax increments on sawlogs has been welcomed by wood fibre industries in Finland and China,
particularly by the Finnish pulp and paper giants who have yet to organise alternative sources of fibre before the full force of the levy is felt.
For Russian enterprises investing in new sawmill equipment to add value, this latest tax postponement by the Russian government has caused a hold on operations because high volumes of fibre will now continue to be exported in the round as opposed to dimensioned stock.
In the carcassing market, competition is running high among UK importers, and landed stock levels are higher than demand dictates. But since the summer, importers have been steadily reducing the purchase volumes and, as a result, stock levels have become more manageable than in the first half, when there was a virtual glut of whitewood from all sources.
Although trading is competitive, and even ruthless, there is evidence that the rate of price decline has stemmed and levels have bottomed out. Fewer traders are panic selling at a loss in order to generate liquidity from funds tied up in overbought goods.
As one importer described the situation, “We have probably passed that point of no return where companies who are going to fail will do so in the next few months. There is little to be gained by the rest from giving stock away; it is better to steer away from unprofitable orders, and survive by trimming overheads and increasing efficiencies.”
Credit insurance crunch
On top of the difficulties facing companies in the fight for business, there is now the added complication of credit insurance. Many companies are complaining bitterly of the withdrawal of cover against their customers by the credit insurers’ and their underwriters. Sometimes this is unwarranted and is putting strain on business relations, but underwriters are adopting an ultra-cautious approach to any industry supplying the construction sector.
This problem has affected many importers, but some have reported that it has not significantly impacted on their customer bases, giving the impression that not all insurers are acting in the same manner.
When the recent sharp fall in the value of sterling is taken into consideration, logic dictates that softwood prices need to rise in order to maintain the same value. The pound has been gradually sliding throughout the year against the euro, from a high of around £1/€1.41, to a low of £1/€1.11, a gap of over 21%.
It is uncertain whether the inter-bank rate will fall any further, but in many cases the consumer exchange rate has reached parity, and commercial rates are not far behind. The pound has fallen against the Swedish krona by a figure of just under 10.5% since June of this year, so unless there is a sudden realignment it can be argued that the Swedes will have a better chance of selling in the UK in 2009 than the other exporters.
Whichever source the UK chooses to buy from, prices should recover in the new year, otherwise the health of the industry will get weaker and we will lose many names on the way.
