Just as the plywood and OSB sectors thought trading conditions were getting back to normal, national and global issues are creating challenging conditions.
UK demand for both panel products is at a good and stable level – a merchant contact described plywood as “one of the most boring products” at present – but rising energy prices, the cost of living crisis, the war in Ukraine and the persistent backdrop of Covid threaten to throw the market off course.
“With Brexit, Covid and now Ukraine it seems to be never-ending. It’s not been the easiest few years,” said an importer.
He said the sanctions against Russia, imposed in response to its invasion of Ukraine in February, had an immediate impact, creating shortages and increases in oil and gas prices. It had transported the market back to similar trading conditions experienced in March last year after Covid lockdowns.
“We had just a few months off to catch up and now it’s back to the chaos and challenges that come with a shortage,” he said.
And the biggest challenge for him is the cost of freight, influenced largely by escalating prices for oil and gas.
“Currency is fairly stable and the price of raw material and product has remained within a 10% range, but freight has gone up. In the last three months alone there’s been a 25% increase on product that’s purely just freight,” he told TTJ.
The price tag for a container from the Far East peaked at US$15-20,000 – or US$300/m3, which doubled the cost of the product. In comparison, break bulk is around US$100-150/m3.
“No-one will be using containers at that cost,” the importer said, adding that the increase was not just the result of fuel costs but container companies’ schedules.
He believed container prices would fall to a “more palatable” level, and that would even out the market, but it was unlikely to happen until Q3 or Q4 at the earliest.
“A lot [of shipping companies] were sending empties back so they could load again; busy fools losing a lot of money,” he said.
Another importer agreed that freight was a major headache. He said Chinese plywood order volumes had fallen off since Chinese New Year in February because of the buildup of stock in the UK and the break bulk shipments on their way.
This was causing serious congestion at Tilbury and other ports where warehouses are full, waiting for buyers to deplete their own stocks.
Four break bulk vessels, carrying mainly plywood, were arriving at Tilbury each month and the importer knew of two vessels diverted from Tilbury to Dundee. The shipping line covered the extra inland haulage charges but that didn’t mitigate the inconvenience, especially for those with warehouses in Tilbury.
Some importers have always shipped break bulk but those used to containers are desperate for the availability to rise and the price to fall.
“Everybody is saying they can’t wait for containers to come back into operation so they can buy little and often rather than huge volumes at one time,” said an importer. “A lot of companies are having to pay large amounts in one lot rather than small payments over an extended period and with larger volumes they risk being left with expensive stock,” an importer told TTJ.
China’s recent Covid lockdowns could also affect plywood supply. One importer said production plants were operating but the problem was getting the product to ports because trucks could travel only in the province where they were registered.
Another importer, however, thought China’s Covid restrictions would have little impact on Chinese plywood availability in the UK.
“There’s plenty here now and plenty on its way. People have probably overbought because they foresaw challenges to shipments from China. I don’t see it having a big effect unless it carries on for a few months,” he said.
There is no doubt, however, that the war in Ukraine and the sanctions against Russia are dramatically affecting birch plywood.
One importer told TTJ that as soon as the sanctions were imposed he received enquiries for birch plywood made in China.
“China can produce genuine birch plywood using birch veneers from western China. They are produced in accordance with Russian grading rules and we’ve had our first trial orders,” he said.
The veneers are thinner than were normal for birch plywood so it was a compromise but his buyers were made aware, he said.
But Timber Development UK has warned against buying birch plywood from outside Europe.
In a trading note published in April, it says that, outside Europe, Russia is the main supplier of birch logs and the organisation is not aware of any other global source that has native birch logs that could be used to meet the significant demand from the UK or Europe.
“This means that it is highly likely that any new sources of birch plywood being offered to the market such as from China, Vietnam or elsewhere will be using Russian birch logs sourced after the invasion of Ukraine took place,” it says.
As the raw material is classified as “conflict timber” it does not meet the EU and UK timber regulations so cannot legally be placed on the market in the EU or the UK.
Timber Development UK says that last year the UK imported around 200,000m3 of birch plywood, of which about a third came direct from Russia. This makes birch plywood the largest single product category directly affected by the sanctions.
And it goes on to warn there will be a shortage of birch plywood as the year progresses.
“There are very few products that can match the unique properties of birch plywood, which makes alternatives hard to find. The alternatives that do exist have limited availability so there are unlikely to be significant volumes available,” it says.
It suggests alternatives may be: high quality European poplar plywood; Indonesian and Malaysian tropical hardwood plywood; Canadian Douglas fir plywood; and okoumé (Gaboon) plywood.
“Eucalyptus-based plywood from China is unlikely to provide a suitable alternative for most birch plywood applications, but individual suppliers may be able to offer products which could help to replace some of the volume being lost,” the trade note says.
A merchant contact also predicted that spruce plywood could face availability problems because of competing demands for spruce logs. He reported no issues with South American softwood plywood or Chinese hardwood plywood, although he said that it could be because “we’re burning through UK landed stock” and there could be problems ahead.
A big unknown is to what extent the UK’s cost of living crisis will affect demand. In April inflation hit 7% – it’s highest level in 30 years. The Bank of England predicts it could reach 8% and some economists believe it could go as high as 10%.
“The cost of living crisis must curb demand; I can’t see how it will fail to,” said a merchant.
Another said product prices would have to rise but he was unsure whether they would be readily accepted.
“The new build sector is still buoyant but the RMI market may be under challenge. Last year people started saying they would postpone projects and the price started tumbling,” he said.
Although traders are faced with challenges from all sides, they are managing to retain the better margins established over the past two years and are hoping that the industry, and its customers, now recognise timber’s true value.
“For the 10 years prior to Brexit we had no major disruption, but probably no-one was making money. We were selling the product far too cheap,” one contact told TTJ.
“If everyone had put the price up 10 years ago it wouldn’t have had a detrimental effect on the construction industry because it’s a relatively small part of building a house.
“Prices have come down from the highs but let’s hope we can get through this and the price remains reasonable. No-one expects it to remain at the highs but even if it’s 20% below, that’s 25% better than a few years ago.”
