Summary
• Many mills producing fencing and pallet timber have reduced production.
• Some companies have applied for credit extensions.
• The price of material sold to mills fell by 25% within two months.
• Pallet manufacturers may take their Christmas breaks early.
• A revision to ISPM 15 may be approved early next year.

The fencing sector is being forced to contend with low demand, falling prices and a customer base which, in many instances, is facing a survival battle of its own.

Many of the mills producing fencing – and pallet timber – have either curtailed production or have closed completely.

“Half-time sawing and three-day weeks have become the norm,” said one company. Another said that more capacity shutdowns were likely at mills and that “some of the least efficient ones may not reopen”.

The fierce struggle for available business has precipitated a sharp drop in the price of UK-grown wood, while overseas suppliers are struggling to compete given the added burden of higher transport costs and the strength of the euro and the US dollar against the pound.

Bleak outlook

Another mill operator said that, based on early discussions for next year, the outlook appears “pretty bleak” because many customers are carrying substantial stocks. “And all of us are sitting on expensive logs that still have to work their way through the system,” he said.

With the sawmilling sector’s current sales prices described as “unsustainable”, some companies are understood to have made approaches for credit extensions – as they did during the 1990s market downturn.

“The new spectre is bad debt,” said one company. “Fear of business failures is uppermost in our minds.”

Harvesting volumes are reported significantly lower than usual, while prices of material sold to the sawmills have reportedly decreased by, typically, a quarter within the space of two months. Negotiations for 2009 business are already under way and the pressure is said to be for further reductions.

At the other end of the chain, a fencing specialist said: “Mills have been dropping prices to encourage us to buy, but we can’t because we haven’t got any buyers even though we have dropped our own sales prices.” Indeed, the majority of fencing manufacturers are keeping their stocks to a minimum in order to reduce financial outlay and improve cash flow; at the same time, they have the comfort of knowing that supplies can be acquired relatively quickly.

Fencing contractors

For fencing contractors, order volumes have dropped significantly in recent months – several put the year-on-year decline at anything up to 25% – and no improvement is anticipated in the foreseeable future “because people have got other priorities for their money”.

According to a leading supplier of fencing and garden products to major DIY retailers among others, sales of fencing panels and posts, as well as decking, are in line with budget whereas shed purchases are improving. Meanwhile, trellis and decorative fencing products are falling short of sales expectations. “It’s not clear if this relates to a conservative buying trend among consumers or is weather-related,” said one contact.

He confirmed that a significantly more conservative budget has been adopted by his company for 2009, with the sales turnover target reduced by 15% compared to 2008. “We are already seeing evidence of downgrading such as in shed build quality,” he said. “We expect the middle ground to be the suffering point because customers at the top end are still going to spend.”

Although its timber costs have fallen in recent months, the company is attempting to agree higher prices with its leading retail customers in order to offset rising energy, distribution and insurance costs. Since a significant proportion of raw materials are imported from Euro-zone countries, the exchange rate is having a substantial, adverse impact on the business, the spokesman said.

Sales hopes

As ever, a winter punctuated by high winds would serve to boost fencing-related sales in the UK. But since assistance from natural forces cannot be guaranteed, many suppliers are pinning their hopes on stagnation in the housing market leading homeowners to invest in their existing properties, especially as many may choose to forego a holiday next year and may therefore spend more time in their gardens. The downward adjustment of interest rates could assist in boosting expenditure on homes, it was added.

Others approach this theory with greater caution: one contact believes that the home improvement market is already showing signs of strain “because a lot of people fund this on credit” which, as he pointed out, is becoming increasingly difficult to secure. Another source accepted that high winds could force many householders to fix broken fences for insurance and security reasons, but he added: “They are more likely to repair than to replace.”

On a brighter note, market conditions are somewhat more encouraging for suppliers of what could be termed non-standard fencing. Certain government bodies are continuing to invest in capital projects with a fencing element while sales of round fencing into the agricultural sector among others are proving relatively robust.