After a quieter than expected third quarter, shippers reported a better start to the final quarter, with more enquiries during October and some improvement in demand up to November.
In the background, Sterling weakened noticeably against both the Euro and Swedish Kronor in September and October, swinging downwards by 6.7% and 8.3% respectively from a high point in the summer months, to a low mid-October.
While prices were quick to follow the downward trajectory as Sterling gained in strength in the first eight months, tough competition and over-production froze selling levels at the bottom of the graph irrespective of the fall in the pound.
Depending on the timing of shipments, producers absorbed the effects from currency squeezing their returns when selling in GBP. Underlining exchange rate volatility, and how a week can turn margin to loss, Sterling began to climb again late October, breaking through the £1/SKr13 barrier once more.
Euro-based exporters fared marginally better than their Swedish counterparts as there was a larger drop between Sterling and the Kronor, but with much higher volumes coming out of Sweden, maintaining market share was a more pressing problem than a price adjustment.
In the imported carcassing market, the move to pure C24 continued to gain further momentum and, in the eyes of timber merchants, the grade has become the distinguishing feature against C16 homegrown production. Although there has been a high volume of carcassing available on tap for merchants to call in at short notice, some specification gaps started to show from September.
Several shippers commented on the erratic nature of demand from European buyers with requirements shifting longer specifications back to mid-range lengths. Recent reports from mills speak of a depletion of lengths from 3.0m-4.2m. Also, 75mm thickness has been difficult for some buyers to source through September, but mills are currently receiving deliveries of larger logs and production has slowly started to fill the gaps.
While margins have been under pressure higher up in the supply chain, many merchants have benefited from falling prices, and contacts confirmed an increase in margins. With the exception of some who tied into larger and longer-term contracts with national housebuilders, most merchants have not witnessed any undue end-user pressure to drop price. In many cases, 2015 has proved an excellent trading year. It has been the rivalry for volume among softwood shippers that has forced down prices and obliterated margins, a self-induced problem. uk mills hope for weak pound The reversal in Sterling’s position brought hope to homegrown industry mills that they might regain some ground against the resurgence of imported material, but with imported prices remaining flat at base levels there was little to be gained. In fact one contact felt that if his mill reduced prices in the current market it would not guarantee more volume, instead, but simply undermine profitability of existing sales.
In the redwood joinery grade market, higher inventory levels have caused concern at mills, with production exceeding demand, a similar situation to that of carcassing. Weaker demand from the Middle East and North Africa (MENA) economic zone has stemmed imports to several of those countries including Egypt and Saudi Arabia. Some of the larger Nordic forest products companies have recently stated that the global outlook for softwood is uncertain, and cite the reduction in China’s growth as a factor, which will also determine the overall ability of the market to absorb volume.
One contact attributed a drop in the company’s global sales directly to weakening demand from the Middle East and North Africa. Emerging economic growth in MENA countries has been mainly attributed to the strength in commodities, but recent price declines in oil, steel and minerals have undermined that progress.
Redwood prices from the Nordic region have reduced considerably, but the lowest prices relate to clearances of certain accumulations rather than picked specifications. There is a commonly held opinion that a cutback in production is essential, and it should come sooner rather than later.
As the MENA countries are substantial importers of Russian production, weakening demand from that region has raised concern among Nordic mills that an oversupply situation could develop as they wonder how much of that Russian wood might be switched back into traditional European importing countries, including the UK.
Russian Price Uncertainty
The weakness of the Rouble will affect the cost of fibre at Russian mills, but the price of logistics to distribute Russian softwood will remain constant because it is paid for in hard currencies other than the Rouble, i.e. euros, pounds and US$. This raises a question about where prices might lie, as while shipping costs remain certain, the devalued Rouble makes the actual fibre cost very competitive. One contact confirmed there was a pent-up supply of Russian redwood and whitewood that could put pressure on the UK market. However at this stage, many buyers have indicated they will stick with Finnish and Scandinavian producers that have supported them through the ups and downs in global demand. Only a highly significant price differential would induce them to change current buying policy.
Between January and the end of August this year, exports of Russian timber to foreign buyers increased by approximately 17% in terms of volume, but the overall value of revenue reduced significantly by almost 10% compared to the same period in 2014. With the two statistics going in opposite directions, the price drop for goods produced in Russia during 2015 appears to have been dramatic.
Steady Clears Sales
Sales of the more specialised softwoods such as WR cedar and Siberian larch, have been steady according to some contacts, and in spite of ups and downs in the construction sector, cladding has enjoyed relatively firm demand and continued to be specified by architects for commercial and municipal building projects. That is also true of modified products such as thermowood and densified wood.
Softwood traders around the UK all report high levels of competition, even in the Southeast, and demand has been weaker than anticipated. Merchants employing ‘just in time’ buying cycles are beginning to detect some gaps in specifications in spite of the fact that overall landed volumes are still high. Timber frame activity in Scotland has been busy, but smaller scale projects in the south are said to be patchy, and some independent manufacturers are struggling for orders to keep running.
Recent media statements from some of the UK’s large building supply groups have pointed to a real slowdown in both house building and the remedial sectors, causing a reaction in the City and share prices to drop. The news was tempered by a more upbeat feel to October, but the underlying trend has been a concern across several large businesses selling the whole range of building products including timber.
This situation can be underpinned to some extent by statistics, where analysts have pointed to a reduction in construction output by 1% in July and over 4% in August. Despite any limitation on growth, the UK looks to continue as a market of choice for shippers, but for solid softwood products it will remain competitive and can only be served by a better balance between supply and demand. Any further short or mediumterm ‘dumping’ of volume will only lead to a lot of unsold wood sitting on the quay.
The message from construction is that timber is becoming a more respected material as newer technologies, including crosslaminated timber and Structural Insulated Panels, open up opportunities in building design. But the potential for growth in basic structural softwood as a commodity is far more limited, and this must be taken into account by the sawmills.
