It would be wise for everyone in the UK fencing and pallet sectors to have had a good rest over Christmas because it’s likely that the new year will pick up where 2020 left off.
The festive holidays will have provided but a brief respite for markets working at a pace never seen before. The upsurge in demand for pallets and fencing began in the first lockdown in March and continued unabated through to December. While fencing products were going from the production line and out the factory gate with barely a pause, manufacturers were also grappling with the well-documented shortage of raw material.
As the year drew to a close, traders expected little change in market dynamics in the first half of 2021. In early December one fencing manufacturer had already sold its entire production for January and had received enquiries for March.
These extraordinary market dynamics were highlighted in a warning from the Timber Trade Federation (TTF). On December 10 it advised timber users and buyers to “strengthen their purchasing strategies” in consultation with their suppliers as a lack of stock on the ground and tight supply conditions were set to continue into Q2, 2021.
The TTF pointed out there had been no “quiet season” in the UK building sector and so sawmillers and importers were unable to replenish stocks.
The same has been true for the fencing sector. Late autumn and winter are traditionally the time for manufacturers to build stock in preparation for spring but continuing demand, fuelled by people spending more time in their gardens while in lockdown or on furlough, denied them the opportunity last year. At the same time, raw material supply could not keep pace, forcing some mills and fencing manufacturers to introduce allocation measures.
“We’ve moved to a managed volume system, essentially saying ‘this is what we’ll cut in January and this is your slice’,” said one mill. He added that customers welcomed the move as it provided some supply certainty.
A fencing manufacturer said he was still receiving his fixed number of loads from his main supplier but it was a different story with secondary suppliers. He wanted to buy more volume from them but in November two announced they would not take any more orders for 2020 and one cancelled some they already had.
Fencing customers desperate for stock are spreading their enquiries but manufacturers are prioritising existing customers.
“After the first lockdown we only supplied fencing customers who had bought from us in the previous three to four months and we’ve continued with that,” said one producer. He added that sales eased slightly in December, but they were still twice the level of December 2019 and he didn’t expect any let-up.
Another manufacturer said demand in the second half of last year was up 30% on the same period in 2019. The company was operating at full production and introducing extra shifts in the new year to bolster preseason stocks.
In July, another trader notched up an all time sales record. Throughout the year the company had achieved about 90% of normal levels – well above the 45% it anticipated when the UK went into lockdown in March. It had also not expected the “avalanche” of enquiries it received and at one stage there were three people working 13 hours a day to respond to emails.
The business has been working on allocation with its products and expects the same approach from its suppliers. “Most of our sawn supplies come from one mill but with our secondary mills we have simply asked what they are prepared to do for us. We can only expect to be treated as we treat others,” TTJ was told.
Demand for fencing, and indeed all timber products, has continued at such a rate that raw material supply cannot keep pace. One trader explained that it was not so much a log shortage but a case of consistent demand not allowing any breathing space.
“Effectively we’ve emptied the supply chain of logs because we were running at full tilt when we wouldn’t normally be,” he said. Mills are turning their log stacks more quickly and some have reduced the number of sawing days.
One fencing manufacturer said his company had capacity to process three times the raw material volume it was receiving.
“We’re hand-to-mouth at a time when we’d normally be building stock to sit on high levels going into the spring,” he said.
There is little fat to meet a sudden surge in demand if the UK suffers any winter storm damage.
The market imbalance has inevitably meant prices have risen, with mills generally placing monthly increases, and customers are so hungry for product that they readily accept the new charges.
According to one contact, in December a standard British timber fencepost was £220/m3, or £270/m3 for imported. He predicted that in January the British timber price would rise to £250/m3 and the imported to £300/m3. Another said his decking rose by £25/m3 – around 7% – in one hit.
A seasoned timber trader told TTJ he had never seen anything like it. “Unprecedented is a much overused word but the current situation is just that. I’ve never seen demand like this, I’ve never seen a situation where customers are accepting significant price rises month on month.”
Better Communication
This acceptance is partly down to the supply chain working more collaboratively and communicating better to provide a good understanding of issues. “Everyone has been in the same boat, not just in our sector but across the timber industry. Whether it’s good news or bad news, keeping customers informed gives them some certainty,” said one manufacturer.
But while companies, and the TTF, are fairly certain the current market dynamics will endure through the first half of 2021, there is inevitably some uncertainty. As this report was being prepared, the UK was teetering on the precipice of a no-deal Brexit – companies dealing predominantly in UK timber would be insulated from a no deal but those relying on imports could encounter border delays. In the event, of course, a last minute deal was struck, but the impact at the borders has yet to be fully revealed and the potential paperwork involved in importing goods could also add to company workloads.
For the foreseeable future, however, Covid will dominate the landscape. Businesses now have well-established Covid protocols in place but the changing tiers, the restrictions of the new lockdown and not knowing how long the pandemic will last, create uncertainty. And then there is the longer shadow the pandemic will cast on the UK economy.
“Yes, we have been buoyant because people have money to spend instead of going away, but what happens when they realise that money is not going to last them long, especially if they have lost their employment?” said one contact.
Another agreed that Covid was “setting the agenda and is likely to continue to do so for most of 2021”.
“Inevitably the potential negative impacts will increasingly frame the debate on future demand,” he said.
Pallet Sector Faces Covid/ Brexit Dual Challenge
After the huge surge in demand for pallets during the UK’s first lockdown in March, pallet demand is now at a more normal level.
The need to keep the pharmaceuticals and food supply chains moving during the first lockdown required pallets and kept some pallet manufacturers busy, but the halt to construction created a void for others.
Now, with the building industry back to work, and some companies trying to make up for lost time, and panic buying subsided, pallet demand is steadier.
Pallet stocks are light, however, so any sudden rise in demand will be difficult to meet. In addition, TTJ was told, the UK has emptied itself of second-hand pallets so the need for new pallets has spiked demand for pallet wood.
While the pallet sector has been grappling with Covid-19 it has had the added pressure of preparing for Brexit and the requirement that, from January 1, all pallets going to Europe must now be heat-treated to ISPM-15.
Timcon president John Dye said the whole industry – manufacturers, the second-hand sector and pallet pools – had worked hard to increase the UK’s ISPM-15 capacity. This has been achieved through investment in new kilns, more efficient use of current capacity, and communication with customers to gain a more accurate picture of their pallet needs.
For the past three years Timcon has been working closely with Defra to prepare the industry for the change. One of the latest outcomes has been government approval for heat-treated components to be used for ISPM-15 repairs until July 31 (see ttjonline, November 19), which Timcon believes will ensure there are sufficient ISPM-15 pallets available.
“Our industry report in 2018 found there were more than 44 million repairs so if we’d carried on the way we were we would have had to heat treat 44 million pallets. Now, being able to use heat-treated components for repairs we won’t be tying up capacity in kilns and new pallets will be heat-treated more quickly,” said Mr Dye.
A big issue, he added, was that no-one really knows how many pallets have been going to Europe. Some major pallet users want their whole pallet pool to be heat treated because they lack the space, or the means on automated lines, to segregate ISPM-15 from those not heat treated.
One UK pallet manufacturer estimated it needed to produce an extra 1.6 million heat-treated pallets. It can achieve this by doubling capacity through having its kilns work harder. “We haven’t been working kilns 24/7 and there’s no reason why we can’t,” TTJ was told.
Timcon has also been heartened by the findings of the latest UK Wood Pallet & Packaging Market, published in December. The report, commissioned jointly by Timcon and the Forestry Commission, estimated that 48.3 million wooden pallets were repaired in 2019, up by 5% on 2018. The figures for newly manufactured pallets remained similar to 2018, at 44.9 million.
Mr Dye said the increase in the number of pallets being recycled was “consistent with our aim to encourage the reuse of wooden pallets and packaging first and foremost, before recycling at the end of their useful life”.
As with other sectors, timber supply is a major issue for pallet manufacturers at present, especially when they compete against the fencing sector for raw material.
“Mills are cutting 100×22 pallet wood but if they cut it diagonally and treat it they’ll get double the price they will get for a pallet board,” one contact said.
Rising Prices
In the last few months of 2020, pallet wood prices rose by ?25/m3, pushing them close to ?190/m3. Manufacturers are expecting further increases this year, which would take pallet wood prices to a record high of more than ?200/m3. The raw material accounts for 70% of the pallet price so these increases have to be passed on to customers.
Manufacturers fear that prices will rise and then fall quickly. There is an industry consensus, reflected by the TTF’s warning in December, that there will be no drop in prices at least for the first half of this year.
There is said to be more Latvian timber coming into the UK, which should help.
One contact said this desperate need for raw material had led to some pallet manufacturers having to buy long lengths and then cross-cut to size, which is something that normally would not make commercial sense.
“They’re doing things they wouldn’t usually consider, such as cross-cutting 2m boards out of a 2.4m and creating the waste because it’s all they have to meet their customers’ demands,” a contact said. Despite the current challenges, the pallet sector is optimistic for 2021. There is a feeling that they have weathered the worst of lockdown, when major industries such as housebuilding and car manufacturing were brought to a halt, and they are ISPM-15 ready.
“We have just finished setting our sales forecasts for 2021,” said one contact.
“Some of our customers are showing increases, others are saying they will be at 2019 levels. It’s a mixture but I do think there’s a confidence.”
