Summary
• Softwood markets remain weak and carcassing stocks exceed demand.
• Baltic shippers have backed off from UK deals rather than sell at a loss.
• Exchange rates mean UK buyers are more likely to source from Swedish and British mills.
• Mills that can meet specific demands are doing better in the UK.
• Last year Latvian exports to the UK fell by more than 300,000m³.

The global fall in demand for softwood has exerted severe pressure on Baltic producers to reduce production. But for the larger producers committed to high volumes, current selling levels are too low to avoid making losses and this leaves them in a difficult position because their costings are based on a minimum level of throughput.

During 2008, prices fell steadily as demand weakened and competition from Germany and Sweden intensified. In the second half of the year, the situation worsened for exporters who were still selling in the UK, as sterling’s value fell consistently against other major currencies. At this stage, UK prices should have risen accordingly, but buyers were not prepared to pay more, leaving shippers to swallow the difference if they wanted to trade.

Exchange rates

The exchange rate gap between sterling and the euro reached its widest point in December 2008 when the pound had dropped 25% from the previous January, and by 17% below the 12-month average. At that point, the Baltic mills were faced with a disproportionate price adjustment compared with their Swedish competitors. This is because in the same 12-month period, sterling fell by only 7% against the mean average value of the krona.

The pound has recovered slightly this month, and at the time of writing it had risen by 11% against the euro and had returned to last year’s average against the krona.

As trading resumed in January, softwood markets remained weak and carcassing stocks still exceeded demand. This gave little incentive to buyers to show much interest in forward contracts. Even sales to China slowed as export orders for many types of goods fell sharply, affecting most sectors of Chinese industry, including forest products.

This month, Baltic shippers approached UK importers looking for first quarter business, but very little volume has been concluded. Low prices in the UK carcassing market caused many shippers to back off rather than sell at a loss, unless they had specifications to dispose of. Even the cut-price German producers turned away from the UK as prices in the euro-based countries looked more attractive.

Due to the effects of exchange rates, UK merchants and importers are more likely to buy from the Swedes and British home-grown mills in the first quarter. The largest Swedish sawmills tend to rely on volumes from the UK, and they are expected to continue competing to secure new business.

There is a further school of thought that higher prices being paid by Continental buyers in euros are likely to induce smaller Swedish mills to avoid the UK in favour of other European markets.

Tailored specifications

Against this difficult background, some Baltic mills have achieved a level of success in the UK by offering tailored specifications in line with buyers’ specific demands. Latvian mills in particular, still export volumes of green unseasoned softwood which they can ship with KD. They also offer longer lengths than the Swedish sawmills would generally cut, thereby commanding a higher premium.

Many smaller Baltic companies have been curtailing sawmilling activities, and turning their hand to value-added products such as fencing panels, laminated sections, joinery components and timber buildings. This has given them better margins, and enabled them to get a higher yield from their raw material by using up smaller dimensions.

The downturn in global demand has affected the current price of sawlogs, and Baltic mills are now taking deliveries at lower prices than last year. Although softwood fibre is still relatively expensive, contacts in the Baltics fear that some mills will be tempted to increase production on the basis of falling log prices.

This worry is underpinned by the fact that there is still excess production in northern Europe, and any more volume could worsen the existing fragile price structure.

Latvian exports

Last year, Latvian exports to the UK fell by more than 300,000m³ on the previous year to below 400,000m³, yet the UK remained its most important export market. This year, the UK trade has forecast a considerable overall reduction in softwood imports to around 5.36 million m³, but some importers believe the figure could be even lower at around 5 million m³, particularly as there is little sign of recovery in the housing market. Given this, the UK is hardly a market that could absorb further increases in softwood production.

In the US, lumber markets have showed further signs of weakening and some hard-hitting forecasts predict another drop in demand this year of almost 15%. Even if the US dollar strengthens further, making European prices look more attractive, it is unlikely that Baltic shippers will find the opportunity to ship increased volumes to the US.

In Latvia, over half the forest stands are certified under PEFC or FSC, but of that certified resource, it is not clear what volume is good commercial sawlogs. The Latvian government favours increased expenditure on new wood technology, rather than encouraging companies to produce low value products from expensive raw material. It hopes the industry will avoid ramping up the production of sawn softwood, and instead, it will invest in products of the future such as new treatment processes and fabrication.

For those Baltic (and Swedish) shippers considering an increase in carcassing production in 2009, the message from buyers is “control volume at all costs”, otherwise the softwood trade will continue to suffer from the uncertainties of price instability, while trying to prioritise the more demanding job of budgeting for end-user demand.