Prices of imported softwood have started rising as exchange rates expose sterling’s weakness against the major currencies.
International investors have reacted to Moody’s recent downgrade of Britain’s AAA rating to AA1 by selling pounds in favour of other currencies, and this has increased downward pressure on sterling which is losing ground against the US dollar, euro and Swedish krona. Further speculation about negative interest rates is not helping and, if they were implemented, this would cause further weakening of the pound and continue to push up the cost of imports into the UK.
As a result of the exchange rate movements, imports of carcassing and joinery softwood from Sweden, Finland, the Baltic states and Russia have become more expensive. Products from North America are also costing more, not only because of currency, but because dollar prices have strengthened in domestic markets. In some cases, product prices have more than doubled against those recorded at this time last year, OSB being the prime example. Solid lumber from the eastern seaboard has increased in price by more than 30%, while the movement of western SPF is nearer to a rise of 40%.
Exchange rates combined with shippers’ needs to stem losses are having an immediate effect in the UK, and contacts in both the importing and agency sectors have confirmed that many customers are accepting and paying higher prices rather than lose supply.
From the exporters’ perspective, currency is not the main issue. Mills are facing difficulties from a wider downturn in European demand, forcing them to pursue other markets. In spite of production cutbacks, many sawmills are suffering serious financial difficulties, and carcassing producers in south Sweden in particular have been running at a loss for several months, squeezed between high log prices and weak demand.
Baltic mills are suffering the additional difficulty of raw material shortages, making demand an almost secondary issue. With less to cut and on the basis ‘you can only sell it once’, they are confident that they will sell whatever they can produce at a price that makes sense.
In terms of sterling’s falling value, when compared to the average rate over the past 12 months it has fallen by more than 4.5% against the dollar, over 6% against the euro and over 8% against the Swedish krona. Compared with the highest rolling 12-month exchange rate against the krona (May 2012), the pound has fallen approximately 14%. This means that where a cost price from Sweden was £180/m3, it is now worth £205/m3, solely down to sterling’s slide without the exporter adding anything for higher log costs or freight increases.
Home-grown production
Whitewood carcassing prices in the UK have been tempered to some extent by production from the home-grown industry, where a differential of around £20 less per cubic metre has been maintained. Cheap fibre from Irish mills has caused an additional ‘drag factor’ on the market, leading some buyers to think they will be able to use the prices to negotiate supply from other producers at the same levels.
Contacts from the British softwood industry have reported strong demand, reflecting the increased market share gained over imported material, and even in the current climate, where overall demand is still far from in recovery mode, some mills are close to being sold out. In spite of the Irish competition, it is likely that the busiest UK mills will follow imported price trends upwards while still maintaining the same differential.
Turning to supply, Latvian producers are faced with a cut in log supplies due to harvesting restrictions, and prices have already soared by 15-20% since January. In turn, this will reduce production, and on top of tha problem, log sizes are averaging a smaller diameter which, according to one Latvian sawmiller, will lead to reduced specifications.
Another Latvian contact said that all his production for the first quarter has been sold, and buyers are accepting the fact that prices for the second period will be at a higher level again. They would prefer to agree contracts well in advance to maintain supply.
In the south of Sweden where the largest portion of C16/24 carcassing is produced, the situation has become critical. According to several sources, some substantial bankruptcies are expected among mills of both small and large stature, and there is a sense of rising panic in the industry. Demand is poor and costs are escalating, yet some mills selling to the UK have become frozen in what might be described as ‘economic headlights’ and are not reacting decisively enough to counteract the situation. In spite of the very real change in exchange rates, some shippers are still working from a static selling level and have not adjusted their prices to at least balance the equation.
Away from the dry-graded C16/24 market, both sixth grade whitewood and sawfalling quality have advanced between £10-15/m3 (€12-18/m3), and buyers have been more concerned with getting supplies into their yards than arguing about price. It is becoming an accepted fact that a growing number of customers are more informed about the supply chain, and the knowledge that mill inventories are reducing has made them proactive in securing the specifications they need. A high proportion of these volumes is for planing or industrial use, which is not dependent on the fortunes of the building industry.
The redwood market has been firming steadily since the beginning of the year, but supplies have been tight and many end users have substituted good quality whitewood for planing and components instead. Russian redwood cargoes have been reducing year-by-year, and the decline in volume available to the UK market has forced more buyers to turn to Nordic productions to satisfy their specifications.
Siberian shipments
As mentioned in previous TTJ reports, the largest volumes cut in Siberia are being shipped to China. Also, the North African markets are paying up to €55 more per cubic metre than UK and European buyers, and they are attracting redwood volumes from other parts of Russia, including Archangel. These volumes are becoming lost to the traditional British and Continental buyers.
Across all markets, fibre availability and costs have become the key driving forces instead of demand, and for UK buyers the uncertainty over currency exchange rates has added a further dimension to the situation. Although many importers have covered their anticipated requirements on the forward market, buyers are still waiting on the sidelines hoping that price increases will either ease up or peak, and current weak demand will force shippers into negotiation.
Given the circumstances the sawmills find themselves in, to try to absorb any further rising costs or to offset some of sterling’s falling values would be little short of commercial suicide, so prices have to rise. Production cuts in the Nordic and Baltic regions, combined with reduced inventories at mills and buyers’ yards, mean shippers can be confident of selling what they can produce.
Alternative markets
As the Nordic producers are searching for improving alternative markets, the latest news from Japan is of a €15/m3 increase on current export prices of redwood. This will attract increased volumes from Finnish and Swedish exporters normally destined for European buyers.
There is a growing consensus in the UK trade that any serious rise in demand now could be more of a problem than a solution. Agents are concerned that they may not be able to cover the requirements of customers who delay making a decision to buy and leave things too late. In some cases this watershed has already been passed.
Stocks held at terminal operations are expected to come under growing pressure in the near future, as buyers who have acted too late will need quick lead-ins to top up their stocks. One distributor commented that the market had already improved and carcassing stocks were beginning to become depleted. He noted that, as the market prices rise, all competitors were now increasing their selling prices.
With such a trend developing, the trade will need to make replacement costs a high priority as further price increases are expected to hit the market in April. As one agent put it: "Clearly anything bought before March 1 will be a bargain".
