Summary
• Many importers increased forward purchases and Baltic producers are faced with competition.
• Some Baltic shippers’ bullish approach to price has left them overstocked.
• Rising inventories have led to panic selling by some mills.
• Swedish producers are poised to offer cheaper deals.

After a very disappointing summer, the trade was hoping that the market would recover some lost ground during the last quarter. Instead, business in the UK has barely reached the levels normally expected for this time of the year.

This situation is in stark contrast to last year and the first half of 2007, when softwood was in short supply and demand was consistent. Timber shortages induced many importers to increase the volumes of their forward purchases, but they now find themselves over-committed, with stocks arriving at relatively high prices in a market where levels have fallen.

Much of the problem relating to supply issues can be attributed to the downturn in US housing activity, combined with fallbacks in Japan and Continental Europe. This has created a weak global market, and overstocking in all major importing countries.

As a result, shippers have found it increasingly difficult to find buyers for their production, and Baltic producers are now faced with fierce competition from all directions. German producers are being particularly aggressive at the moment due to the fall in sales to the US and because they increased production capacity through investment in machinery upgrades earlier in the year.

Swedish producers are also poised to offer cheaper deals as inventories have been rising since they returned from their summer holidays. Supply has been further increased by the return of some traditional Canadian suppliers to the UK and, although limited in numbers, some are planning to cut to UK specifications on a long-term basis.

Refusal to meet obligations

During the peak trading periods of 2006 and the first quarter of 2007, demand was so buoyant that, according to some importers, their Baltic shippers refused to meet their obligations unless contract prices were adjusted upwards to reflect the rising market levels. At that time, it was not difficult for mills to sell their production and, even when the early warning signs of a shift in the market began to emerge, they remained bullish to the last.

But, by turning down offers during the third quarter, some Baltic mills found their order books were virtually empty, although production was still running at capacity. Now the inventories are over-filling as export volumes drop.

For those Baltic shippers sitting on high levels of stock, the prospects of selling at a profit are looking more difficult by the day, as German carcassing mills are now cutting prices to the bone in order to secure business. A substantial proportion of the current German production is still being converted from storm-damaged logs, which in some cases has led to quality claims by importers for insect damage and staining.

In order to protect cash flow, some UK traders have put back their shipments from anything between one to three months; and there are cases where the boot is now on the other foot, with UK importers negotiating price reductions or even cancelling Baltic shipments.

One agent commented that buyers were still smarting from the period of shortages when their Baltic mills had nothing to offer. When those same mills now approach them to buy current stocks, they have held back saying: “where were the mills when we needed them? Now they are only offering us stocks because the other markets don’t want anything.”

Panic selling

Rising inventories at the mills, and continuous production, have resulted in a spate of panic selling. In the current market conditions, the importance of timber agents has been brought under the spotlight, as they are able to give both buyers and sellers a more realistic idea of where the market level is, as opposed to working solely on rumour.

One of the revealing issues to come to light over the past two years is the strength and standing of contracts between shippers and importers. In years gone by, they were enforceable and backed by the law and the various timber associations and federations. In recent times, they have been broken on many occasions, particularly in Russia and the Baltic states, and importers have simply put this down to experience.

If shippers and importers do not honour their obligations to one another in the future, this will bring further chaos to a market that already feels like a roller-coaster ride.