The first of the four meetings held each year by the Forestry Commission Advisory Panel, Supply & Demand sub-committee is traditionally used to review the previous year’s trading as well as assess conditions at the start of the new year.

This year followed the same formula – but the vehicle has changed slightly. Following the Forestry Devolution Review, the future of the FCAP sub-committee is uncertain. A ‘quasi’ Supply & Demand sub-committee meeting was held on February 12 and another is provisionally planned for May 14.

Trading conditions for most sectors of the UK forest products industry were generally difficult for the whole of 2002, with reasonably strong demand but poor profitability throughout the supply chain as a result of increased competitive pressures. Difficulties in the markets for small roundwood and sawmill co-products also intensified.

The year saw continued strong competition for sawn softwood from Sweden, Latvia and the Irish Republic, although there was some evidence of upward price movement for UK construction grade softwoods towards the end of 2002, in line with rises in imports.

Currency exchange rates, particularly sterling against the Swedish krona, had a major impact on prices for square edged material in the UK. Other factors affecting UK sawmills included the continued decline in demand and prices for co-products; the climate change levy; Package Recovery Notes (a tax on the disposal of packaging waste); a hike in insurance premiums (by as much as 100% in some cases); and the steady increase in fuel costs. Sawmills are therefore struggling to cope with increased costs that are outside the control of the industry.

Fencing market

The fencing market performed well in 2002, after a slow start to the season due to poor spring weather; and decking and other timber garden products continued to be popular. However, the pallet sector was extremely difficult – with strong competition from the Baltic states (both hardwood and softwood) and the Irish Republic.

Many softwood suppliers to the pallet and packaging sector have responded to the decision by the Chinese authorities to impose new plant health requirements on solid wood packaging. These are based on (but not identical to) the requirements of ISPM 15, which will require either heat treatment or fumigation of solid wood. Other countries are expected to implement ISPM 15 during 2003/04.

For 2003, the softwood sector reports a relatively slow start – especially for construction grade and pallet material. However, severe ice conditions in the Baltic Sea – leading to increased freight rates and problems finding suitably ice-rated vessels – have caused shortages in certain specifications. This presents short-term opportunities for UK mills.

With regard to timber supply, there continue to be concerns in some parts of the country that local authorities may impose weight restrictions on fragile rural roads – resulting in areas of forest becoming ‘landlocked’. Despite government pressure to reduce reliance on road transport in favour of rail and coastal shipping, prospects for this in the forest products sector are limited. Even where rail or sea transport proves to be economic, in most cases there will be a requirement for wood to be transported on rural roads from the forest to railheads or ports. It is therefore apparent that further work is required to ensure that wood supplies are not disrupted, with investment needed to bring poor quality rural roads up to acceptable standards.

Geographical location

Private growers say geographical location is playing an increasingly important part in determining economic success. Woodlands in Scotland and northern England generally have ready access to markets, and demand for mill specifications was reasonably steady throughout 2002 in these areas.

However, demand in England and Wales has declined steadily as a result of the closure of a number of significant milling operations – and the extra haulage costs incurred in moving timber further afield renders some forest operations uneconomic.

Supply of timber remains generally strong, boosted by projects postponed during the foot and mouth crisis as well as the growing supply particularly from private forests. Supply was further supplemented by modest volumes of windblow in eastern Scotland at the start of the year.

While sawlog demand matched supply for most of 2002, the situation for small roundwood is very different, with ever-greater volumes displaced by recycled fibre (RCF). This will be exacerbated when the UPM Shotton plant in Wales converts to 100% RCF.

UPM has worked hard to mitigate the impact of this change in raw material requirement through the export of roundwood and chips to a sister plant in Finland. Around 150,000 tonnes was exported last year from ports around Scotland and it is hoped that this will continue, with additional ports being used. Nevertheless it is likely that some of the displaced chips will divert to other processors, displacing further volumes of roundwood.

There is therefore an urgent need to find other markets for roundwood, and one particular focus has been fuelwood. The use of wood fuel is well established in other European countries and there is huge potential for development in the UK (in 1998 the share of renewable energy as a percentage of total consumption in the UK was around 2%, compared with more than 15% in Portugal; more than 20% in Finland and Austria; and nearly 30% in Sweden).

&#8220Specifiers and users of hardwood are increasingly asking about sustainable forest management and certification. The apparent unwillingness of FSC to enter into discussions with PEFC with a view to achieving mutual recognition is a source of considerable frustration to the industry”

Heating projects

Much of this potential lies in the substitution of oil or gas for fuelwood in existing central heating systems, particularly in larger public amenity buildings. A number of these smaller-scale heating projects have been successfully established in the UK, but a greater commitment from the government will be required to promote further development.

Forest Enterprise says there were a number of more positive signs during 2002, including a generally better year for the wood based panel sector, increasing prices in some sawnwood grades and the introduction of a significant export pulp market. However, weak demand due to the loss of a number of key markets, increased availability of timber on the market and continued downward pressure on pallet, fencing, chipwood and co-product prices has meant that roundwood prices have continued to suffer.

The market for sawn hardwood was fairly stable during 2002, but there was a further reduction in UK production. Many long-established hardwood sawmills have either ceased or curtailed primary processing operations, in favour of importing and merchanting European and North American production. The decline in UK hardwood sawmilling capacity is expected to continue – although some hardwood sawmillers are investing in added-value processing.

As has become the pattern in recent years, good quality UK hardwoods sell well and second quality material is difficult. Oak continues to be particularly sought after, although much of the demand is satisfied by imports – particularly from France. Sycamore and sweet chestnut markets have also been good.

Hardwood certification

Specifiers and users of hardwood are increasingly asking about sustainable forest management and certification. The apparent unwillingness of FSC to enter into discussions with PEFC with a view to achieving mutual recognition is a source of considerable frustration to the industry.

Private growers say the reduction in UK hardwood sawmilling led to a further fall in the volume of standing timber coming onto the market. On a brighter note, hardwood pulpwood demand has increased and forms a valuable income stream for many growers.

UK panel producers have seen reasonably strong demand for many products, especially from the construction sector, but competition from imports remains strong and prices are therefore depressed. The ready availability of relatively low-priced RCF is undoubtedly allowing UK panel mills to maintain competitiveness, but means that tensions in markets for sawmill co-products continue unabated from last year.

The increasing use of RCF by UK panel manufacturers will continue, driven by funding from the government’s Waste and Resources Action Programme (WRAP). With £40m available over a three-year period, this offers substantial grants to overcome some of the technical issues surrounding RCF.

In the paper and board sector there was some downtime in 2002 as a result of the economic uncertainty – which has continued into 2003. Advertising remains below historical trend levels and mill production rates look set to remain below 90% for at least the first six months. It is becoming accepted that a full recovery is unlikely before early 2004.

With some notable exceptions, expenditure on capital projects in the pulp and paper sector has been conservative, with companies focusing on reducing high cost capacity.

There were no serious wood supply problems for the paper and board sector last year – although some imported material was sourced to supplement UK supplies. Low production in the first half resulted in some gate restrictions to maintain stock at an appropriate level; but some of this was offset by better production in the second half.

Wood supply difficulties

However, the first couple of months this year have seen difficulties with wood supply, due to a combination of adverse weather conditions, the reduction in the number of contractors, and fierce competition from firewood merchants during the winter months.

This year has started with a number of positive factors, including the decision by the Bank of England‘s Monetary Policy Committee to cut the interest rate from 4% to 3.75%. In addition, exchange rates have shown some reversal of the trend in recent years – with a much needed strengthening of the euro, Swedish krona and Latvian lat. Although there has been some price increase for certain product grades over the year, this trend needs to continue in order to provide some respite for UK producers.

Nevertheless, the fact that these trends are moving in the right direction is cause for some optimism.