In comparison with other UK industries, timber was among a number of largely buoyant sectors in 2015 as macro-economic factors provided healthy trading conditions. An analysis of late payments across the industry – part of a wider piece of research which analysed all overdues reported by the 250,000 businesses covered by our trade credit insurance – found that the number of payment delays decreased last year compared with 2014.
However, the somewhat surprising failures of Associated Timber Services – a profitable company with a £2m positive balance sheet – CF Anderson Timber Products and the Leaderflush Shapland/Interiors Manufacturing Group, despite receiving some significant external investment, show firms across the sector still face significant financial risk.
Large failures in the construction sector, such as PC Harrington, Southdale, Crestel Partnerships, Drytech Facades and Longcross Construction are also impacting, and result in a ‘domino effect’ across the supply chain. Despite an overall drop in late payments across timber year-on-year in 2015, subsectors operating close to construction saw a rise. Joinery firms, for example, reported an 11% increase over the same period. This disparity illustrates our underlying view that risk levels certainly heighten the closer timber businesses work with the construction sector. There are always exceptions, of course, but for comparative purposes late payments in the latter rose 43% last year compared with 2014.
Looking forward, the outlook is uncertain. With growth across construction set to continue to stutter, due in part to the acute skills shortage and inflating input costs, timber businesses operating in close proximity will continue to face considerable risk. As for the broader industry, company margins are coming under increasing pressure as UK timber prices show only marginal signs of upward movement following a 15-20% per cent fall in 2015. Despite activity levels holding up in the UK, the impact of global economic factors is responsible for the drop.
Falls in demand across emerging markets are certainly partly to blame. The slowdown in North Africa has had a significant effect, in addition to the deep recessions in Brazil and Russia and the well-documented falls in demand in China.
Foreign exchange movements also create significant volatility. With Sterling’s downward slide making the UK an increasingly less attractive export market for Swedish mills, the latter are increasing their focus on other markets, where returns are greater.
The uncertainty surrounding Brexit is compounding this problem, with the pound likely to lose further ground in the run up to June’s referendum. Providing an accurate forecast beyond the vote is tough. While you’d expect sterling to rebound following an ‘in’ vote, it’s difficult to predict what might happen should the UK choose to leave the EU.
Despite falling commodity prices, interest rates and low inflation, companies are not set to enjoy any improvements in UK consumer confidence in the short-term. Concerns about current economic prospects are dampening the mood with confidence 18 points lower in March than at the same point in 2015, according to research from GfK.
Looking at the timber frame and structural timber sectors, these macro-economic factors, together with the acute skills shortage in construction, are weighing down on investment decisions. The number of new homes being built continues to fall behind government targets.
The next 12 months will, therefore, be challenging for management teams across the timber industry. Keeping a close eye on margins and stock levels will be the key to avoid holding too much product should prices fall further. Tough decisions will need to be made on strategy and in addition, teams will need to be assertive on whether to make further purchases in a falling market given the potential impact on working capital.
Together with keeping tabs on the key market trends, maintaining an attentive approach to credit and working capital management will be particularly important if firms want to protect themselves from getting into financial difficulty. This requires good customer and debtor management and simply keeping an eye out for any changes in payment behaviour, such as a rise in Day Sales Outstanding (DSO).
