After last year’s strong performance, a slackening of demand during February has put pressure on prices and left buyers in a cautious mode. All eyes will now be looking to March in the hope that softwood sales will pick up sufficiently to make a dent in the cargoes currently landed on the quaysides. Softwood trading started the new year at a brisk pace, with shippers agreeing that January was a good month for both volume and revenue. UK importers and merchants replenished their inventories after the yearend when many had trimmed their stock levels for the holiday.
As February progressed, stocks at the UK ports rose steadily, while at the same time UK demand quietened. This combination of events put pressure on selling prices, which inevitably led to traders discounting prices of carcassing specifications. Some sectors continued to remain busy through February and pallet and packaging specifications have held up well. Home-grown mills reported steady trade, with fencing products in early demand as buyers ensured adequate supplies were booked in advance.
Apart from a general quietening down of demand in the merchant sector, the rise in stocks at the quay could be attributable to worries over Brexit in some traders’ minds, which is resulting in their tactic to stock up. Concerns over possible changes to import regulations after the UK exit date from the EU on March 29, and the possible effect on customs clearance and shipping delays might have induced some buyers to import extra volumes at the beginning of the year.
In the run-up to Brexit, the UK Timber Trade Federation (TTF) has made representations to government on behalf of the industry and it is currently understood that for the vast bulk of softwood products imported from the EU, there will be no tariffs or specific inspections of bulk goods (see pp16-18). However, single trailer loads via ferry lines could be caught up in delays with the general mass of intercontinental road transport, depending on the ports used.
Import documentation should be subject to similar reporting as the current intrastat returns, but it will also be important that shippers include the wording used for phytosanitary certification on their invoices such as ‘kiln dried’ and ‘free from bark’ and so on. Any difficulties facing imported goods could provide further opportunities for the home-grown mills. VAT issues may become more complex in the case of consignment stock owned by companies abroad but landed unsold in the UK. Members of the TTF are able to get updated guidance on importing issues as they develop; so far no major concerns appear to have been identified.
In terms of imports, sterling’s recent value has been determined by political discourse on an almost daily basis dependent on the chances of a ‘deal’ or ‘no deal’ Brexit. While researching this report, the mood among financiers in the latter part of February was erring towards the likelihood of a deal.
Exchange rates at the time of writing were £1 = €1.15/SKr 12.21 and rising, which reflected a strengthening of the pound since early January by around 4.5% against the lowest euro rate, and virtually 8% against the Swedish krona from €1.10 and SKr11.30 respectively. Any steep rise in sterling would affect inventories held in pounds, so the best outcome from the currency markets would be gradual movement in either direction over months rather than days.
Looking ahead, the uncertainty over negotiations between the UK and the EU is likely to engender a climate of caution across the softwood trade, and with high stocks at the ports, merchants should be able to satisfy their standard specifications promptly. This could lead to a cooler forward market during April and May with the accent on more specific shipping requirements to keep inventories in balance.
After a lengthy period of indifference, there is now more widespread evidence that demand for graded and stamped roofing battens is picking up in all areas. Several of the larger producers are well sold and some are struggling to keep up with demand. The situation is reminiscent of the period when BS4978 made kiln-dried graded carcassing a requirement under UK building regulations for internal structural use. It took several years for the industry to fully comply with the regulations, and it would appear that, at last, stamped battens are being used correctly for roofing installations.
Looking back at last year’s production figures from the main producers in Europe, and examining their estimates for 2019 reveals how the softwood supply chain is likely to pan out during this year.
In 2018 the largest European producer was Germany with a steady 22-23 million m3, while it imported around 5 million m3. Its consumption, the highest in Europe, was around 19.5 million m3, leaving global export volumes at 8.5 million m3. The 2018 figures are expected to be replicated for this year and should contribute between 5-6% of UK softwood imports. It is worth noting that Austria and Germany combined are expected to produce over 33 million m3 of processed softwood, making that region second only to Russia which produces virtually 39 million m3 per year.
Swedish production in both redwood and whitewood is likely to increase in 2019 by approximately 400,000m3 from 18.3 million m3 to 18.7 million m3, a rise of 2%. Some of that extra production looks destined for the home market rather than exports, which should reach around 13.15 million m3. Sweden remains the largest supplier to the UK, providing over 40% of imported softwood. Total softwood UK imports are expected to reach around 6.5-6.7 million m3, but the Brexit factor could undermine that figure and force shippers to divert some exports to other countries.
The Baltic states have a combined production of 5.68 million m3, with Latvia being the largest exporter and currently the second largest supplier after Sweden to the UK, accounting for between 16-17% of imports. None of the three states are forecasting an overall growth in exports for this year, as the availability of fibre is both restricted and expensive. Latvian mills in particular supplement log supplies by sourcing goods from Belarus and Russia. The Baltic states import around 3 million m3 of sawn fibre, while Belarusian sawn softwood exports are around 2.5 million m3, a figure that may include some volume of partly processed logs.
Finland is the UK’s third largest supplier with around 14% of the British market share. Softwood production equates to approximately 12 million m3 per year and this year the Finnish sawmilling industry is predicting an increase in exports by approximately 2% to reach 9.45 million m3. Finland’s production remains broadly in step with other European producers as there are no stated plans to ramp up production during the year.
Taking all the available data relating to the European supply chain (including Russia and the CIS region), production volumes planned for this year appear to be steady and reflective of those seen in 2018.
Both 2017 and 2018 were arguably supplydriven markets falling short of demand, indicating that if consumption follows the trend of the past two years, the markets should stay in balance.
Unless there is a large drop in demand in the UK, perhaps influenced by Brexit uncertainty, the current high stocks at the ports should return to balance during the first half. All European countries (including Russia) are forecasting similar volumes of softwood consumption to last year, or a minor increase of +0.3% in total. The US is predicting growth in consumption of 1.8 million m3 (2.19%), which could allow for more exports from Europe.
This leaves the MENA region and China as the potentially balancing factor as to whether or not some production will remain unsold and looking for a home in Europe. Russia has established itself as the largest supplier to China, and is likely to satisfy any increase in demand from that country, so the European sawmills might find that a hard market to cling onto.
It is important to note that the UK is still the single largest and most important softwood importer in Europe, and with a pent up need for more housing, this in theory should be another strong year for the trade. The big question now remains: will the effect of Brexit uncertainties rob the trade of the stability it has enjoyed so far, or will the budgets, estimates and predictions made in Q4 last year need some serious revision? Suppliers across Europe are watching events unfold just as closely as the UK trade, and everyone hopes for a positive outcome.
