Summary
• The Baltics are competing with Germany and Sweden, which still have access to storm-damaged logs.
• Baltic log inventories are high but wet weather has affected harvesting so mills could face shortages.
• Many Baltic mills survived difficulties in the past by adding value.
• Inflation in Latvia is running at around 14%, and at 11% in Estonia.
As the value of sterling continues to weaken against the euro, Baltic sawmills are being forced to bridge an ever-widening gap between break-even selling prices and the market level in the UK.
Since October of last year, the pound has steadily dropped to a current level of £1/€1.274, representing a downward shift of 12%. But instead of a corresponding rise in softwood prices, selling levels have continued to fall, largely driven by shippers’ attempts to force wood into an already saturated market.
This position has created an uncertain outlook for many sawmills facing increasing costs in energy, labour and transport, while coping with a diminishing return on sales.
Competing in the whitewood carcassing market is currently more difficult for Baltic mills, because other exporters in both Germany and Sweden still have access to storm-damaged logs. A two-tier log market still exists in both countries where storm damaged material is being converted at a lower cost than freshly cut fibre. Reports on whether or not stocks of wind-thrown fibre are about to become exhausted are contradictory. Some speak of a situation where the last batches are already in the system, while others give the impression there is enough fibre at some mills for the whole of 2008.
The disparity in prices between storm logs and fresh cut fibre equates to an average of approximately £10/m³ (as sawn stock), and it continues to cause confusion amongst merchants and importers who are trying to get to grips with where the true market prices are, and whether or not they have bottomed out.
As one merchant described the situation, “every time we put an order on, somebody says they could offer the same goods cheaper. We have no way of knowing if the stock is being offered on a like-for-like basis, but if we get discoloured or poorly graded goods in the yard we will send them back”.
Devaluing stocks
Another commented that the fall in softwood prices had seriously devalued stocks to a far greater extent than appreciation had enhanced them in 2006 and the first quarter of 2007. No matter how low prices dropped, he added, there would be no resulting increase in demand, only a loss in revenue and margins.
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“Many of the Baltic mills have experience in surviving difficulties, and have been more able to adapt to changing circumstances than their counterparts” |
The downturn in global demand has meant that log inventories at the Baltic mills are commensurate with the current cutting schedules, and compared to the shortages at this time last year can be regarded as vastly improved. But very wet weather through recent months has turned many forest access roads into quagmires, and mills could find themselves facing shortages again.
Some sawmills have been supplementing home-grown log supplies with imports from Sweden, where there is spare fibre available; but this extra cost in logistics is expensive, and also increases the carbon footprint involved in production.
A worrying fact emerging from Sweden, is that some of the big carcassing mills are full to the brim with stock. They don’t have the physical space for their daily production and are reported to be resorting to land rental deals for somewhere just to put stock down. With little improvement in global demand expected in the short term, pressure is building for them to off-load stock at reduced prices to any country they can sell to, and this could push other producers out of the market.
Unlike the Swedish mills, Baltic producers are working on a shorter raw material cycle. Recent visitors to Latvia report that there are no excessive stockpiles of logs at the mills, and very little wood unsold or awaiting shipment at the berths in Riga.
Adding value
Many of the Baltic mills have experience in surviving difficulties, and have been more able to adapt to changing circumstances than their counterparts. Last year, for example, when fibre was in short supply and mills were running at low capacity, many turned to producing more value-added and manufactured products such as fencing panels and garden furniture. They were also able to take advantage of an improving home market.
Now the economic outlook is becoming more difficult. Inflation is reaching the 14% mark in Latvia and wage increases averaged over 32% during 2007, albeit from a comparatively low level.
The same issues are affecting the other Baltic states. Estonia is undergoing a period of high inflation combined with a downturn in economic growth; while inflation is running at just under 11% in Lithuania, although its government believes it is coming under control.
As with all sawmills in northern Europe and North America, Baltic producers face two choices: either they reduce production and attempt to tighten control of their financial position, or they keep producing to reduce unit costs in the hope that demand will improve and returns will compensate for any losses. Either way, the choice is difficult, and could force more producers to close production altogether.
