UK demand for plywood is reasonable but Brexit uncertainty, the slowdown in US housebuilding, weakening European markets and some oversupply are all taking their toll.
The stability over the past two years gave way to a softening market last December and now traders are expecting a flat performance for both hardwood and softwood plywood at least into Q3.
“Normally through summer we’d be steaming ahead but it looks as though it’s going to be tight this year,” an importer told TTJ.
While some importers and distributors said UK demand for birch plywood was holding up well, describing it as static to firm, others believed buying levels were 20-30% below the highs of late last year. Either way, everyone recognised there was oversupply – largely because of new capacity in Russia, as well as a good winter harvest that yielded plenty of raw material – and prices have fallen accordingly.
“Most importers are still carrying higher priced stock on the books because of slow sales through December to February,” said one contact. “Lower priced stock will start arriving in April/May, with even cheaper stock to arrive in June.”
Despite the plentiful supply, an importer said lead times were still extended because of a shortage of containers as a result of the sanctions on Russia.
It’s uncertain as to whether prices have reached the bottom but the fact that some major producers have taken early shutdowns may stem the tide.
In the meantime, one importer urged traders to hold their nerve for the sake of the wider market. “Importers need the discipline of keeping things simple and maintaining back-to-back selling. A lot offer forward prices before stocks arrive so they’re offering a falling price earlier than they should and there’s the danger that has a snowball effect on the market,” he said.
UK demand for Chinese plywood is said to be reasonably steady, if somewhat unpredictable, but securing good quality supply is an issue. Many factories in China have closed permanently since the government imposed stricter environmental regulations and plywood that is available does not always comply with the EUTR.
Some Chinese producers are also concentrating on the domestic market, which ensures a more predictable income and frees them from the higher tariffs on exports to the US and the erratic exchange rate with the dollar.
One trader told TTJ that UK stocks of Chinese plywood were high and “could last a few months” as importers had built stocks prior to the Chinese new year and also in anticipation of Brexit and expiry of the EU coniferous plywood quota.
An importer told TTJ that some companies that had been holding stock in bond had taken it out of bond and put it against the quota to avoid paying duty.
There are reported to be plenty of high priced stocks of Malaysian and Indonesian plywood in the UK, bought last year when mills were demanding higher prices because of log shortages and firmer freight rates. An extended spell of dry weather had enabled mills to build their raw material stocks so prices were now stabilising. With replacement costs now easing back, some importers are being forced to sell stocks at lower margins.
Some buyers are also substituting Malaysian and Indonesian material with cheap Chinese plywood, said one distributor.
The softwood plywood market has felt the full impact of the slowdown in housebuilding in the US and the sudden crash has caught out some UK traders.
“Everyone was bulking stocks because there were shortages and prices rose, then it suddenly crashed as the US turned the tap off.
It meant there was a glut of very expensive material in the UK,” said an importer. Prices fell and are now about 25% lower than the end of last year, meaning some traders have “haemorrhaged” money in the past five months.
He expected the market to continue to be flat and hoped that in the second quarter traders’ stocks would become more balanced with demand.
The uncertainty and lack of confidence created by Brexit is having some effect on trading, and now the deadline extended to Halloween prolongs that uncertainty.
The true impact of Brexit, however, is hard to extract from many factors affecting the market, including slowing economies around the world.
Some believe the higher stocks may be partly down to companies safeguarding against a no-deal Brexit but one importer thought this unlikely.
“For most businesses it’s impossible because it requires so much finance, and stockpiling for what? We don’t know what we’re going to be faced with or when,” he said. “Also, prices are falling so if you’re stockpiling, you’re stockpiling expensive stock.”
Another put the current situation down to normal business and economic cycles, although “Brexit isn’t helping”.
An importer agreed that Brexit had not had a huge impact on business but he pointed out that a lot of the cost flowing through the UK economy was yet to be realised. “At the moment we might be in a false position,” he said.
Brexit was creating general uncertainty, said another importer, but as the outcome could not be influenced, his company was concentrating only on the “controllables” in its business.
Traders are hoping business will lift in Q3 and that the traditionally busier autumn business – “the banker months of October and November” – will follow.
“Once Brexit is settled and we know what the UK is doing we hope there will be a boost as people feel more settled and confident about the future. Projects that have been shelved may be resurrected and demand will pick up again,” said an importer.
Slower demand exposes OSB oversupply
The fairly stable OSB market of the past two years is becoming a distant memory as demand has eased off, highlighting the global oversupply.
There’s been a great deal of investment in boosting OSB capacity in recent years, both in the UK and Europe, and in the current market manufacturers are hungry to shift volume. The slowdown in the North American housing market is also having an effect.
In the UK, demand has softened across all sectors, including construction. The situation has been unbalanced further by European producers looking for sales here, although at the same time UK exports have risen.
“We had a fairly firm 2018 with appreciating prices but for the time being we’ve hit a brick wall,” one distributor told TTJ.
He added that stock levels were very high and distributors/importers were trading OSB aggressively, while one supplier described the market as “brutal”.
During the first quarter prices varied a lot as distributors moved stocks at whatever level the market dictated and now they were watching carefully, hoping to stabilise prices as soon as possible. However, it is likely that pricing will remain soft during Q2.
Another contact said that although commodity markets were weak, more niche sectors, such as offsite construction, were performing better and tended to offer additional value too. His company had noted growth in demand for more technical panels and he predicted that this would continue.
UK traders expect the OSB market to remain flat into Q3 and what happens after that hinges largely on the Brexit outcome.
“People in our industry are pretty much living day-to-day without a long-term view of what’s likely to happen,” said one contact, but added that the blame could not be put solely on Brexit.
“European markets are relatively flat and the North American market for structural panels is sluggish so what we’re experiencing in the UK could be part of a global downturn and not purely because of Brexit,” he said.
Another optimistically suggested that delaying Brexit until October 31 had “pushed it into the long grass” and people may decide to resume some normality but he admitted that continuation of the same was more likely.
“It means prolonging the uncertainty of the last six months to the next six months,” he said.
The current market may be soft but there is confidence that, longer term, OSB offers big potential and the market will continue to grow.
“OSB has carved its own market in housebuilding and offsite construction as the quality and its consistency have improved,” said a distributor.
OSB continues to take market share from softwood plywood and one distributor predicted that in the UK the “significant volumes” of elliottis pine from Brazil would eventually be replaced by OSB.
In the past, OSB prices were pegged slightly below those of softwood plywood but now it stood on its own and no longer depended on softwood plywood’s position. OSB’s success is illustrated by the investment commitments around the world.
The latest OSB survey by TTJ’s sister magazine, Wood Based Panels International, reveals that OSB capacity continues to grow globally. In the year to December 2018, capacity had risen by 34,000m3 to 35.44 million m3. With new mills planned in Russia, China and Thailand, global capacity could reach nearly 40 million m3 by the mid-2020s.
Investment also continues in the UK. Norbord is investing £35m in a second wood room, heat plant and dryer at its mill in Morayhill, Inverness. This follows the start-up of a new line in September 2017 and takes the overall spend in the past two years to £145m.
Kronospan also has plans for an OSB line at its facility in Chirk in Wales as part of a £300m investment programme at the site.
It is currently awaiting planning permission for the OSB line and said that once that is obtained, the line could be built in less than a year and operational in 2020.
