The European sawmilling industry enjoyed quite a good start to 2014. Demand was slowly picking up in most major markets, the supply/demand balance was good and prices were increasing, leading to improved sawmill results.

During the second half, thanks to these stronger figures and good availability of logs, production in Europe started to rise pretty much in all countries.

Unfortunately, consumption did not increase in line and this led to an oversupply situation for the European sawmill industry.

The supply/demand balance since has been very fragile and it does not take many percentage changes in either direction to change the market situation.

Overall production increased in 2014 by 3.3% in the 13 member countries of the European Organisation of the Sawmill Industry (EOS).

This is the biggest rise since 2010. European consumption at the same time rose less than 1%.

As stated, raw material availability for sawmills has been rather good. Prices for saw logs remained high when sawn timber prices started to fall. But in some European countries we are seeing an adjustment in log prices to the new market situation.

There have also recently been legislative attempts to limit log trade and exports from countries like Ukraine, Romania, and Belorussia, and rising hardwood log exports from Europe to China have impacted European sawmills. In fact, in Belgium and France this hardwood drain has led to mill closures.

This is naturally concerning. Although EOS and Europe support free trade, we must make sure that our industries remain competitive compared to other WTO members.

Construction slump bottoms out
It seems that recession in European construction bottomed out in 2013 and the sector’s future now looks brighter. But growth in coming years is predicted to remain moderate.

According to Eurconstruct forecasts, residential construction is expected to grow 1.7% in 2015 and 2% in 2016.

A slightly worrying trend is that one and two family unit building starts are expected to perform worse than flat starts and the former obviously need more wood per unit.

European economic and construction growth overall is also predicted to remain muted, hindered by youth unemployment, government debt levels and market uncertainty, among other factors.

Other issues in the building material supply chain in countries where activity is picking up are also curbing recovery rates. These include availability of skilled builders.

It’s clearly important for the European sawmilling industry to take all these considerations into account when planning future capacity investment.

Sawmills target market share
However, with European construction getting slowly back to growth, the EOS and its members are working to increase timber’s share in the market.

There have already been encouraging developments in many European countries in this field and there are a range of considerations set to spur further advances.

Notable among these is the skills shortage in construction more widely, which strengthens arguments for wood solutions with their high degree of industrialised pre-fabrication and more labour effective utilisation.

European sawmills are major players on the wider international stage too and looking to build their presence in coming years. But different markets promise different prospects.

They have been very active in the Middle East and North African (MENA) markets but geopolitical issues here make for volatile demand and an uncertain outlook.

The population in the region is young, which is a good foundation for economic and construction growth. But without political stability, economies won’t progress and the youth will remain frustrated, fuelling continued unrest.

The potential for the MENA area to become even more important for the European sawmills is there, but risks persist.

Growth in the Chinese construction and construction products demand, including for sawn timber, have created a big new outlet for both European and Russian sawmills since 2007. Even with medium term corrections in real estate and wider building markets, this development is expected to continue.

The main driver in construction in China over the next decade-plus will be urbanisation; the migration of 250 million rural residents to newly constructed towns and cities.

Emphasising underlying positive prospects, even during the recent slowing in Chinese construction activity, European and Russian sawn timber imports continued to grow.

And interestigly log imports have dipped, indicating that imported sawn timber is taking market share from its counterpart produced locally from imported raw material.

With the devaluation of the Rouble against the Euro, it was expected that Russian sawmills would increase production and exports to Europe as their competitiveness improved.

However, the latter has not so far happened, with the exception of the UK, Holland and Belgium, but even there the rise has been relatively small.

So European oversupply has not been worsened by an influx of Russian product.

Where the Europeans have been affected is by rising Russian sawn timber sales to China, Egypt and Korea, which have naturally intensified competition in these markets. Japanese sawn softwood consumption, meanwhile, is back to 2011 and 2012 levels.

The country’s VAT increase last year created a bubble where sawn timber imports, construction activity and consumption of building materials surged to abnormally high levels.

Unfortunately the inevitable subsequent decrease in consumption and imports happened at the same time as production in Europe was rising, putting Japanese prices under pressure.

In the medium term I expect the Japanese market to remain fairly stable, but with no major upturn and factoring in an aging population may mean sawn timber demand is depressed further.

Slow climb to positive prospects
US housing starts have been rising slowly and returned past the 1 million units level.

The recovery has been more turgid than forecasters expected and it’s now predicted that reaching 1.5 million starts may take longer than once anticipated.

And although the demand for sawn timber in the US has been rising steadily, so has North American sawn timber production.

As in Europe, the US supply demand balance has been fragile and we’ve seen US prices weaken since the second half of 2014.

So, even though the US Dollar strengthened against the Euro, exports from Europe to America have not picked up in large volumes, dashing hopes that a rise in transatlantic demand would ease the European oversupply situation.

Whether they come to fruition remains to be seen, but some forecasts do now point to an uplift in North American sawn softwood imports when housing starts approach the 1.5 million level.

Looking forward, if European demand fails to develop or export markets weaken, we will face challenging times and the only solution will be to curb output.

But while the supply demand situation remains fragile and requires very careful handling, I believe the outlook for European sawmillers is positive.

With housing starts improving in Europe and the US, albeit gradually, China continuing to build to meet the needs of urbanisation and the geopolitical situation stabilising in the MENA region, the scenario for 2016 and beyond is looking quite promising.