A year of two halves

As 2012 draws to a close the British-grown timber sector is looking back on a year of two distinct halves – the first, a rip-roaring success and the second a bit of a damp squib.

The strength of the first six months has buoyed the sector during the tail end of the year so that, overall, the picture is still pretty rosy. But while general confidence remains, there are some pockets of doubt creeping in and the expectation is that business won’t pick up again until the spring.

Demand for sawn timber – variously described as "pretty awful" and "rubbish" – has had the expected knock-on effect on log availability, which is plentiful, although there are reports of warning signs of the private sector starting to hold back a little.

Plentiful log supply is a sure sign, said a fencing sawmiller, that the big volume carcassing mills are reining in their roundwood purchasing.

"There’s only so much of the yard they can put product down on and in some cases sawn timber is encroaching on the roundwood stock so they are cutting back on the volume of logs they are taking and that’s putting a lot more out onto the market," he said.

"We’re only purchasing what we need for current market activity levels," confirmed a major sawmiller. "It’s not the way we normally like to do business but the market conditions are dictating what we have to do to manage cash."

Log prices may have weakened slightly as a result but it’s a case of pennies, not pounds, and logs remain expensive, even at the bottom end of the quality scale, which is now being underwritten by demand for biomass.

And any slight easing certainly isn’t compensating for the drop in sawn timber selling prices; the squeeze on sawmillers’ margins is on.

"We have nowhere to go really," said one. "We can’t drop the price of sawn timber because log prices are so high. And even if we did drop the price, what would we be gaining? Is the demand for volume there?"

For the volume producers who hiked production during the first six months and, as a consequence, had further to fall back, this is certainly a tricky time in terms of managing capacities. "There is a massive reluctance from buyers not just to over-stock but to hold any stock and that’s putting a lot of pressure on us," said one. As a result, capacity has been removed by varying degrees – by as much as 20% at one site.

Production strategies Most mills are operating a cut-for-demand policy. "We vary the production level to match the volume that’s going out the door, so if I sell 7,000m3 per week, we cut 7,000m3," said one, adding that his company had made the adjustment without compromising its ability to turn the taps back on and reach full capacity very quickly.

"We review the situation mid-week and if the stats aren’t that brilliant we might knock one of the shifts off. However, this week has been really good and we’re taking on some temps just to get the product out the door."

Within the product sectors fencing is in reasonable demand for some mills. However, while "it’s amazing how much of it still goes out in the depths of winter", it hasn’t really recovered from its downturn in the summer and is still some way off where producers would like it to be leading up to the end of the year.

"We would normally be fairly busy in the fourth quarter as our customers look to stock up for the new year but a lot of them are saying ‘do we really need to put anything down this side of Christmas or can we last out until the new year?’," said a fencing specialist. "They don’t want to tie their cash up in stock that, potentially, they might not turn into product or sell until the new year."

The danger for customers, of course, is that 2013 kicks off the same way as this year when storms in the first week of January created a surge in demand for fencing material and "formed the backbone of the financial year for a lot of businesses".

"It’s the gamble they take," said the fencing sawmiller. "If we have a tough January like before there will be huge demand and prices will rocket." Great from his point of view, he added, but not so good for the customers.

Pallet and packaging timber The market for pallet and packaging wood remains "very competitive", with producers in that sector able to spot buy loads of pallet wood at "very, very low prices".

Some specialists are actually enjoying good demand as their pallet manufacturer customers supply retailers stocking up for Christmas.

"It’s regular business for us and we don’t have a lot of stock as far as first grade materials are concerned," said a contact.

Carcassing remains the big frustration. Described as "lacklustre", "flat" and "very hand to mouth", it’s leading many of the suppliers outside of that sector to be thankful they aren’t allied to the construction industry.

Ungraded, unseasoned commodity sizes are "rolling out the door" but are under "tremendous pressure on price" and while the volume mills are still producing carcassing at the same levels as 12-18 months ago, they have since built in more capacity so have some way to go to reach their full potential.

Looking to recovery Despite the disappointing market, these mills remain confident that their investments in capacity and, perhaps more importantly, quality production, will stand them in good stead come the eventual recovery.

"Once the market turns again we’ll get buyers who are going to prefer UK carcassing," said a contact. "When I talk to architects and specifiers there is a genuine interest in using home-grown as opposed to imported timber – and especially if it is FSC, rather than PEFC certified."

British sawmillers are still very aware that some of the advantage they have over importers is down to currency and outside of their control. "The firming of the pound has taken the edge off but hasn’t undermined it completely," said a Confor spokesperson.

Watchful eyes are being cast at Sweden in particular but as yet Nordic material is still being held at bay, courtesy of the exchange rate. And while Irish timber is still undercutting in some quarters, British producers say their "massive logistical advantage [over Irish producers]" is helping them retain their customers.

That and customer loyalty. "It’s at times like this that you rely on the relationships that you build up with your customers," said one sawmiller. "If they want something the majority of our customers are prepared to pay a reasonable market price rather than screw you into the ground."

"Our strategic partnerships are working out for us," added another.

It’s fair to say that most, if not all British sawmillers have written off the rest this year and are setting all their hopes on the new year and spring.

"There are two reasons that it could be ok [in the first quarter],’ said one contact. "The traditional patterns of demand are almost rubber-stamped year-on-year, so I would be very surprised if we don’t see an increase in activity in the spring. The other reason is the customers’ low stocks. Their inventory levels are so low that at some stage they’re going to have to buy. We’re hoping that there is pent-up demand that will kick-start higher activity. "

Some processors have cause for more optimism. "I don’t think the overall market will improve next year but I expect to take more market share," said one sawmiller, adding that discussions with new and existing customers that had plans for growth next year made him "genuinely positive" about his company’s prospects for 2013.

Ash dieback grabs the headlines

Plant health is "hogging the headlines" and, according to contacts, the "media frenzy" surrounding Chalara fraxinea (ash dieback) is being viewed "somewhat ironically by people in the trade".

"We don’t want to see the ash population decimated and it would have a huge impact on the landscape but we have to recognise that ash is not the commercial species it once was," said a UK Forest Products Association (UKFPA) spokesperson.

"It’s disappointing that we haven’t had the same media frenzy about Phytophthora and Dothistroma which are affecting commercial crops [larch and pine respectively] and having a far greater economic impact."

What Chalara has served to do is to highlight how the UK addresses the threats posed by tree pests and diseases.

"Our borders aren’t remotely bio-secure and it seems to me that this country could and should have done more to protect our tree stocks from pests and diseases through a more stringent approach to monitoring imports," said the UKFPA spokesperson.

"You can’t do anything about spores that might blow across or be carried by birds but the business of importing seedlings or landscape architects importing semi-mature trees is a recipe for disaster."

The concern is that although Chalara may have forced the spotlight onto plant health, it’s also taking resources away from tackling Phytophthora and Dothistroma. "If the government puts resources into it [dealing with Chalara] then that’s great, but if it’s just posturing, that’s another story," said a Confor spokesperson.

Sawmillers certainly didn’t think that Chalara would affect their businesses, although they cautioned that it was really too early to judge its impact definitively.

However, while those mills that are in predominantly spruce areas – the west coast of Scotland, for example – are relatively unscathed, others are taking the brunt of the enforced sanitation felling of larch and pine.

"There’s an awful lot more larch floating around and it’s a challenge finding a market for it," said one sawmiller. "We used to do one run of about 400m3 of larch every six months and we’re now doing about 1,000m3 of larch at least once a month.

"In terms of quality it’s absolutely fine but it used to be a premium market and the sheer volume has absolutely swamped that; it’s now very much a commodity product," he added.

And not everyone wants to substitute larch for spruce. "You can’t make people buy larch just because you have it," said the UKFPA’s spokesperson, adding that additional larch felling by Forestry Commission Wales was likely to take total annual harvesting levels from around 770,000m³ to 900,000-950,000m³.

"The capacity in the sawmilling sector is there but it could be difficult finding customers for it all," he said.

Meanwhile Dothistroma, which is present in all Forestry Commission districts in Scotland but which is concentrated in the north and north-east, is causing concern.

"There are hundreds of thousands of tons of infected trees in the public estate and we’re now trying to establish the extent of it in the private resource," said Confor’s spokesperson. If it’s the same – and there’s no reason to think otherwise – then it’s going to be "a significant problem".

"Some of the crops are so badly infected that they’ll never go near a sawmill but the FC is now targeting to get the best out of the crops that they possibly can so there will be additional pine coming to the market – and perhaps more than people might want," said the UKFPA spokesperson. "Although if there is a good start to the fencing season, that will mop up a lot of it."