January turned out to be a buoyant month for most UK traders, with carcassing sales staying ahead of expectations. Prices remained firm, supported by sterling’s continued weakness and strong demand from timber merchants restocking their yards after the winter holiday.
In spite of the generally positive background, however, a few distributors fell short of their projected market share and, in a bid to claw this back, started discounting prices in February.
This move was seen by many as unnecessary because stock gaps were starting to appear in the UK, mainly due to short or delayed shipments, meaning that many buyers were still actively looking for volume to complete their specifications from landed stock or on short lead-ins.
While part of the UK market was focused on the immediate problems of trying to ramp up more sales, the northern European softwood shippers witnessed robust demand from all export markets, with forward contracts being resolved well into the second quarter.
Irrespective of exchange rate issues, shippers found enough support to increase selling prices in their source currencies namely for Euro and Kronor-based contracts. As prices from continental buyers such as Denmark and Norway inched upwards, Swedish mills in particular also found additional market assurance from industry projections pointing to strong domestic demand.
Sweden’s domestic softwood consumption is forecast to reach around 5.5 million m3 in 2017 (5.4 million m3 2016) which represents a market for over 40% of Sweden’s production. When this volume is allocated to the home market, it leaves a balance from total production to satisfy export markets of around 13 million m3.
Rörvik to close two mills
Latest production news is that Rörvik Timber AB of Sweden is closing two south Swedish sawmills.
The mills, namely Myresjö and Boxholm, are currently estimated to be producing a combined volume of 380,000m3 of softwood with capacity ratings of 150,000m3 and 280,000m3 respectively.
Their closure will have a significant effect on availability from south Sweden where there is a shortage of C24 whitewood at some of the mills. Myresjö being a medium size spruce producer will be missed as a source of supply. It was only in January 2016 that the same group announced the earlier closure of two other mills, Tvarskog and Sandsjofors, which were subsequently acquired last year by ATA Timber AB.
As one importer commented about the industry: “South Swedish sawmilling can be likened to a chess game where the number of pieces on the board keep reducing, but does the final prize money sustain the effort of playing?”
Lower Latvian Log Volume
In Latvia, log volumes at many sawmills have been lower than in previous years since the start of 2017, with some inventories at only 15% of normal levels as raw material deliveries fell short of planned schedules.
Within the species available, higher concentrations of redwood pine dominate inventories, forcing mills to offer more pre-treated wood than clean in a bid to avoid complaints about discolouration. A period of long-term wet weather has reduced access to many whitewood stands, but it is hoped recent cold snaps will last long enough to freeze the forest floor and facilitate spruce extraction.
The problems with log extraction in Latvia, combined with revised log export controls from Belarus and reduced cross border imports from Russia, have contributed to fibre shortages. With supply down to a trickle, some Baltic production has been hampered and ultimately delayed shipments to the UK.
As with Swedish mills, many Latvian producers have contracted for higher levels of forward business also going into the second quarter and, as a result, prices have firmed and buyers have accepted they will have to pay to get the volumes.
As the UK trade moved into March however, the growing price increases for new arrivals were not being reflected in current market sales or in discussions with customers.
Softwood Shortage Looms
Looking at the global balance of supply and demand, another squeeze on UK softwood supplies is likely to come indirectly from the US as a result of ongoing dispute between America and Canada over US import duties and possible quotas.
With the policy widely expected to create shortages in the US just as the homebuilding season begins, some larger Nordic sawmilling groups have mooted plans to allocate higher volumes of graded softwood to America, particularly as prices are currently rising and lumber futures are showing strong gains.
The US predicts softwood imports will be close to 24 million m3 during 2017, but if infrastructure and house building spending increases under the new administration, this figure could rise, with US media reporting growing consumer confidence and construction at its strongest in many years.
Canada is the largest exporter to the US and Canadian producers started reducing supplies in early February due to fears of retroactive duties. They are also actively pursuing opportunities in Asia and India. In addition to duties, there is the proposal of a general US border tax of 20%, which, if applied to timber, could dampen down demand to some extent. But, US annual production of pine and fir would not be sufficient to meet increased consumption on its own.
Market Demand
In the UK, demand for British grown softwood has strengthened, and mills reported a good 2016 to the end of December.
As this year began, the market continued to hold up with a firm requirement for loose fencing materials. In the C16 structural market, Scottish mills found intense competition from Ireland, but in a surprise move, some of the larger Swedes turned out volumes of C16 only, and they priced it competitively enough to attract some volume away from home-grown.
In the quality-graded 6th and joinery markets, the Chinese have increasingly featured as a failsafe to absorb surpluses caused by downturns in other markets.
China’s demand continues to strengthen and it is raising imports for all producing areas.
Russian producers in Siberia with direct logistics links to China are virtually out-sold in redwood, and China is also sourcing from the White Sea ports, which are currently key suppliers from Archangel to the UK.
Swedish redwood mills report firm orders from the Middle Eastern and North African (MENA) markets where they say prices have firmed considerably. In common with structural grade softwood, Swedish domestic demand for joinery grades, planed cladding and decking is predicted to be strong through the year ahead. Several companies have invested in new planing and coating lines just for Swedish demand. The Finns are pursuing similar export trends, with sales of both whitewood and redwood up in all markets following a substantial rise in exports to China during 2016.
In spite of uncertainty over the pending break from the EU, British building and construction markets continue to thrive with national house builders returning positive figures to date.
Barratt Homes achieved an increase in profits to December 2016, although the number of houses built last year was lower than in 2015, but the company says it has increased the new home building rate by more than 50% when taken over the last five years.
Barratt goes forward into 2017 with confidence in the market and a full order book. Redrow plc reported an increase in turnover and results reflected in its half yearly statement issued in December and says it goes forward with firm expectations for 2017. Persimmon and Taylor Wimpey report strong trading and advance sales which are also being helped by improved mortgage funding availability.
UK import value to rise 6%
All the indicators point to a shortage of softwood for the year ahead, with prices rising in second and third quarters.
Summary data shows growth in value of UK softwood imports at well over 6%, to a figure in excess of more than £1.1 billion.
Predictions for 2017 point to a 2% rise in softwood consumption for this year, notably 5% higher in volume than 2015.
The year ahead looks set to be supply led balanced by a steady demand.
This pattern has been seen in previous business cycles, but the signs are that currently too many UK traders are not gearing to the replacement value. Instead, they remain focused on working with their immediate cost prices to determine a market level.
