Summary
• Baltics shippers have been squeezed by cheaper prices in Germany and Sweden.
• Mills have scaled back production, making the raw fibre shortage less acute.
• Shippers are trying to widen the range of their customers.
• Although still lower than other countries, Baltic mills’ costs have been rising.
• Russia’s softwood supplies are still the most influential factor in northern Europe.
Baltic shippers have reacted to the U-turn in global softwood prices by reducing inventories to the lowest levels possible. Larger producers have continued to maintain a presence in the market, but with high prices still being asked for sawlogs, they have found it hard to achieve profitability.
As softwood price levels have fallen every month since the beginning of the year, Baltic shippers have been squeezed by cheap prices from their German and Swedish competitors, and the weakening value of landed stock held in the importing countries has helped undermine the situation further.
The Baltic mills’ main selling advantage has been their willingness to produce specifications closer to buyers’ needs than other supplying countries, but this has not proved enough to command a premium on the selling price. As a result, several mills have pulled back on production, and some have ceased altogether or made the decision to invest in other products, including the fabrication of laminated products.
Raw material
The reduction in mainline sawing activity has made the issue of raw fibre less acute. One Latvian shipper stated that the schedule of increased tariffs imposed by the Russian authorities on log exports was hardly an issue, as there was a sufficient volume of logs available on the domestic market.
Although log prices are still very high, there have been some reductions on the Latvian market, but the situation could change if logging is affected by extreme wet weather.
In the wake of the economic downturn in the US, and its ripple effect on European markets, some Baltic shippers have intensified their efforts to obtain a greater spread of new customers across a wider range of importing countries. As one shipper commented, “it is no longer the case that the mills can depend on a handful of buyers in just a few markets, these days we need more countries to export to, and many more customers in each”.
While sawmills have been reducing prices in order to entice buyers to take as much volume as they can sell, shipping companies have been forced to apply fuel surcharges which amount to an extra 7% of the sea freight. Rises in haulage costs are also starting to bite – the result of rocketing diesel prices in the UK and across the Continent. Several haulage companies have increased their delivery rates from the UK ports to inland destinations around the country.
Rising running costs
Running costs at Baltic sawmills have also been rising, as inflation and wage increases have been hitting double figures. Although they are lower than in more developed economies, they are still a significant factor in determining whether it is viable for some mills to continue in business.
There have been some minor price improvements in the softwood market, but these increases are being driven by the necessity to pass on increased costs, rather than by any improvement in demand. As yet, the sawmills have not seen any benefits in terms of restoring profitability, and they have been striving to stem losses or break even.
In spite of all of these difficulties, some mills are achieving sufficient sales to keep ticking over by putting extra effort into marketing and proactive selling. But the chill economic conditions have caused some businesses to falter: earlier in the month the Latvian banks foreclosed on a well-known planing mill, forcing it into receivership. With 1,000m³ of unsold goods at the quay, the bank offered the stock direct to agents in the UK to sell on its behalf.
Forestry investment
In the forestry estates sector, there is a growing level of investment as funds are diverted away from property where returns are losing their appeal. In spite of the effect the downturn in construction is having on the sawmilling industry, forest ownership is still growing in Europe. But as investors seek better returns, pressure on log prices might grow in the future. On a global basis, returns range wildly between just under 3% per year to over 35%, with UK forestry remaining in the higher category.
For Baltic sawmillers this will mean an improvement in supply over the longer term, but competition from Germany and Sweden will continue to keep sawn timber prices in check.
But it is the size and strength of Russian softwood supplies that is most likely to dominate the situation in northern Europe. As the cross-border trade in logs diminishes, more fibre will be available to Russian sawmillers, and their mills will have a growing impact on the market as investment in grading and processing technology increases.
