As news of the pandemic spread in early 2020, uncertainty grew as to how it would affect the international sawn wood market. With no precedent to steer by, mills kept up production as normal, but with a close eye on how the situation might develop.
The first real signal to the markets was when Covid-19 hit Europe and restrictions and lockdowns followed in April. Exports to many European markets slowed abruptly, with those to the UK plummeting -30-50% on a monthly basis through April-May as purchasers were unable to collect orders. In light of the drastic downturn, sawmills started planning production curtailments and preparing for a bearish market as the effects of the pandemic spread further.
However, in other markets, such as Egypt and China, demand increased and Swedish production was directed there instead. Exports to China grew 83% in May compared to same month the year before and those to Egypt by 78%. With the renewed strength of such markets most curtailments were stopped before the end of April/early May.
However, the damage was to some degree already done, as plans were set through the supply chain in expectation of low demand throughout the industry due to the pandemic. Even as it became apparent that demand would remain stronger than first feared, plans were set and difficult to change. Essential maintenance was scheduled, harvesting plans amended and summer holidays for the workforce extended. Production from Swedish sawmills in April and May decreased by -10% and in July production decreased by as much as -25%.
As summer passed it became apparent that many markets were under heavy pressure, with demand growing quickly, but supply constrained or diverted to other markets. Prices for lumber in the US skyrocketed, increasing by 100% in just two weeks, with fierce competition for the last few studs in stock at suppliers.
Significant US price increases marked the start of a new phase in the market. During the autumn in 2020 price rises spread to the rest of the world market as well, also driven by constrained supply, although in some cases with clearly different fundamentals.
CATCH-UP AND DIY DEMAND
During this time there was a lot of focus on the strong upturn in the DIY sector and home building as key demand drivers, although it could be argued that it provided only part of the explanation for market stresses. The supply that was ‘lost’ during those few months in the spring of 2020 also had a strong impact on the market balance. For example, during the summer of 2020 the UK had a deficit of almost 1 million m3 of timber compared to typical imports from previous years. All while demand was stable, the construction sector was comparably unaffected by lockdowns and the DIY-sector was thriving.
Both UK and US markets were playing catch-up, trying to recover the lost volumes from a decline in supply during late spring and the summer. US buyers had to contend with reduced production from Canadian sawmills, those in the UK reduced imports due to lockdown. As demand was searching for supply with increased intensity and warehouses emptied, prices started to increase at an almost unprecedented scale.
Swedish export prices were almost set on a day-to-day basis. Swedish exports returned in force, refocusing on European markets and others suddenly found it difficult to compete and saw their imports decrease. Egyptian trade went from being 70-80% above normal levels in the spring, to 70% below in the autumn.
In the UK market it took until November 2020 for imports to reverse the deficits of the first half. The situation was similar in the US, with domestic production and net imports starting to exceed typical levels around the same time. But while markets had managed to catch up on the supply side, demand rose still higher and ran at extraordinary levels for a while, fuelled by consumers being on furlough and working from home and government pandemic subsidies and fiscal stimulus measures.
THE PICTURE AHEAD
Swedish sawmills have been running at high capacity for a long time now and expect to do so for the rest of the year. The exception was in January and February 2021, when the cold weather and snow slowed the pace of production. But output in March was the highest for an individual month ever, and later months followed suit. Consequently, it seems fairly certain that 2021 will see new production records set. Demand remains virtually insatiable and despite the efforts of Swedish sawn wood producers the market remains under high pressure with low stocks.
During this summer export demand has remained strong, while production facilities have had to take annual downtime for maintenance and the legally mandated holiday season. In this period a larger share of demand will be met from mills’ inventories built-up earlier in the year. However, the exceptional demand from the end of 2020 into 2021 meant stock levels in spring were already at the lowest levels for 20 years. Despite this, producers have managed to squeeze an additional 200,000m3 out of storage. They also kept up production during the summer maintenance, with output in July 54% up on the same month in 2020 and 16% ahead of July 2019.
In July 2021 Swedish export prices were double the levels at the start of 2020 and have continued to rise at an average 10-15%/ month through spring and summer.
SAWLOGS SUPPLY HOLDS UP
There have been no signs that sawmills have been constrained by sawlog availability. Rather, inventories have been high-to-normal during this whole period. Although, while the spruce bark-beetle situation is much less of a problem than in central Europe, it has still had some impact on harvesting mobilisation and moving volumes through the supply chain. But sawmills have produced as much as they can with available capacities and supply chains. Many sawmills are also now taking the opportunity to invest in their facilities, although this will have limited effects in the short-term.
During the summer US lumber market prices crashed by more than 70% in under two months. Prices are now back to pre-pandemic levels, and there are reports of inventories filling up again. But these large price movements will likely not have any direct impact on the market from a Swedish perspective. While sales to the American market increased significantly during the pandemic, they still only accounted for 5% of Swedish sawnwood exports. The spike in Swedish export prices has rather been driven by sales to the UK and central-Europe.
From a personal perspective, I believe that the US markets could, to some degree, bounce up again during early autumn, impacted by very high sawlog costs and production curtailments in British Columbia. Although I understand that analysts specialising on US markets are more hesitant as to the timings of these market trends and possible effects of scarcity in other construction materials on building activity.
STRONG FOCUS ON THE UK
From a Swedish perspective, the British market remains a major focus and we follow closely developments in building activity, work-force availability and regulatory developments, notably implementation of the UKTR and UKCA.
Many factors regarding the market will need to show their colours as we approach the fourth quarter. There is no doubt that underlying demand remains strong on most, or all, global markets. Even in a scenario where markets start to be able to access sufficient supply to meet demand, expectations are for stability, with prices levelling out. While the US market is renowned for its fast-pace of change and sudden swings, similar instability in European markets would be unlikely.
While the market for Swedish sawn wood is expected to remain strong during the autumn, some volatility can also be expected. We are no longer struggling to catch up and recover lost volumes, but we are now fighting to supply a still super-hot demand cycle, which can be expected to continue to even beyond this year.
Balancing a world market in turmoil with interdependencies between geographies and different construction materials will mean continued market stress. It will take time to find its way back to a new balance and not until then will we know what the new normal looks like.
