Demand for softwood so far this year has fallen short of expectations and, with rising supply, prices have been under pressure resulting in general weakening.
During April the price of unseasoned and dry-graded carcassing fell back by an average of £3/m³ which, on the surface, does not appear too dramatic, but this drop comes from a level where the trade believed prices were already at rock bottom.
Apart from weak demand from most of the major markets, the Baltic traders are still fighting a losing battle against the Swedes who have been using the favourable currency exchange rate of around SKr14.6/£1. The Latvian shippers converting sterling sales back to US dollars are continuing to absorb losses and, with the Lat at 1.098/£1, there is no way they can avoid the reducing returns when selling into the UK market.
Some Baltic shippers have been cutting back softwood production to compensate for the poor state of demand, which is said to have reduced Latvian exports by 20% for the first quarter of 2001 when compared with the same period last year.
Difficult situation
As an indicator of how difficult the situation is for carcassing producers, at current selling levels it is estimated that the independent Swedish mills could be losing around £20/m³ for dry-graded spruce using today’s sawlog costs.
Yet the production of carcassing grade softwood continues unabated in Sweden, and low price levels have been agreed in some cases right through to the end of July.
The Baltic mills are trying to resist following the Swedes’ suicidal trends, but where cash flow is needed then sales have to be taken at the best level the mills can achieve. In the current climate, that level is likely to be below their break even point.
One Latvian shipper said his log prices had eased a little since the beginning of the year, but had a long way to fall before any real benefit would be felt by the sawmills, which have been faced with regular price increases over the past two years.
The downturn in the US and Japanese markets has led to a reduction in trade; although the Lithuanian and Latvian shippers dealing in these other markets are able to obtain better price levels, the volumes are insufficient to sustain the turnover necessary to keep the mills in business.
Change afoot
There is, however, a change afoot in North America which might help to strengthen the market as the year progresses.
The failure of the softwood lumber agreement between the US and Canada has resulted in a very confused situation but, in an almost illogical fashion, prices on the North American market have been increasing during April and to date some consignments of CLS have notched up almost 35%.
The increase appears to have risen from a number of factors including spring demand and the expectation by Canadian producers that a blanket duty will be imposed, consequently supplies have been cut back and prices raised. The duty to be imposed by the US authorities is designed to protect the home-based lumber industry, but the effect has been to ratchet up prices to the consumer.
As the US lumber market increases, so the Japanese market structure normally follows, although this is not guaranteed.
This situation could be good news for European exporters with US grading approval, and those Baltic shippers who fit the bill might find a change in luck during the second quarter.
Demand from central Europe remains patchy and, to compensate, the mills have been placing more emphasis on the UK and Ireland. However, demand from both these markets has fallen below expectations.
The continuing lack of whitewood logs in Estonia has resulted in a drop in exports to the UK and, as an alternative, the mills have been cutting redwood to a mixed grade more suited to the Middle Eastern markets. The British and Continental importers still prefer the characteristics of spruce over construction grade pine because it has a smaller knot content.
Whitewood supplies across the Baltic region are still subject to unsatisfactory logging conditions and the smaller mills operating on a day-to-day basis for their logs are falling behind schedule. The larger mills that have buffer stocks are despatching their shipments on time.
The danger for Baltic producers is that if they fail to perform in the current climate, the Swedes who are well-supplied with spruce logs could capture more volume. The Swedish specifications are showing signs of improvement, and there are more mills offering tailor-made specifications in line with buyers’ needs, a feature that has been synonymous with the Latvian producers over the past two to three years.
Important consideration
As one UK terminal operator described the situation, ‘the Swedish shippers are now giving us what we want, and the availability of the thickness 38mm and 63mm for joists is a very important consideration’.
One thing is certain, nobody can rest on their laurels. The market conditions are continuing to change regularly and, in many cases, at some speed.
Traditional softwood is still under attack from other products such as concrete, and from within by engineered wood products and the blatant mis-selling of unseasoned.
The demand for system-building is increasing and timber frame construction is set to take advantage of the emerging demand. UK builders merchants are waking up to the fact that they may well be bypassed in the future as developers can buy complete units ready for construction with all the fittings already installed.
Avoiding risk
In future, instead of running the risk of receiving unseasoned timber on site, builders will get kiln-dried CLS at a low moisture content as a component part of their frames, and the practice (where it exists) of merchants selling the wrong product will simply be bypassed.
There is an opportunity in the UK for those Baltic mills gearing up for the American CLS market, as the CLS market in the UK has a growing potential for use in prefabrication. Instead of producing a ‘bottom of the market’ sawn product, a more profitable way forward could be to concentrate on value-added planed stock. The big question for the future is, will the importers and merchants have any stake in its distribution or will it go directly to the fabricator?
