Industry tries to mitigate one of toughest years

Summary
• Wholesalers have been reducing stocks at the terminals.
• The Nordic mills will close for four weeks, or more, this month.
• Forward contracts are reducing from months to weeks.
• The high volume of whitewood in circulation has caused problems.
• Timber cladding for municipal and industrial use has performed well.

There has been no sign of recovery in the softwood market since the poor showing over the Easter holidays when sales fell well below merchants’ expectations. Since then, as the weeks have rolled by, traders have become resigned to the fact that 2008 will be one of the toughest years in recent memory.

In an attempt to bring supply and demand into balance, there has been a concerted effort by wholesalers to reduce stocks at the terminals, and by major importers who have been reducing cargo frequency and volumes, and putting purchases on a more hand-to-mouth basis.

Also, in the background, several large shippers have been planning an exercise of production control and cutbacks, but it is unlikely that these will have much effect on the market until later in the year.

These measures are expected to create a partial reversal of the oversupply situation that has ripped the bottom out of the softwood market and forced companies to write down a high proportion of their stock value.

UK importers will welcome reductions in the supply chain while demand looks set to remain weak for the rest of the year. Faced with reducing sales volumes, an improvement in price and margin would help businesses to survive, but the only way to achieve this is to ensure there are no further gluts in the market for the foreseeable future.

It is anticipated that the catalyst for change will be during July when the Nordic mills close for a four-week holiday and shipments begin to thin out. Some producers plan to keep their saw lines closed for a longer period of up to five or six weeks in order to delay production further.

First signs of shortages

The first signs of any shortages should be felt in the redwood market, where sawmills have been planning production cutbacks from an early stage. After coping with the problems of high log prices and a noticeable return to shorter contract periods by their customers, mills are unwilling to let inventories build up without commitments from their buyers.

One contact said that there had been a growing trend amongst buyers to reduce forward contracts for shipment from three to four months down to periods of only four to six weeks. Due to the longer time spans needed to select and process logs from forest to sawn timber, it is extremely hard for sawmills to plan production effectively around this type of short-term demand and the mills will favour those markets where longer term agreements can be reached.

Another commented that inventories were becoming depleted and there were already some shortages of good quality door lining material. These gaps in specifications would become more acute from September onwards and would increase as the year wore on.

Reports from other global markets confirm that buyers are working on very short lead times, and there is likely to be a panic ahead when they will not be able to source all their redwood supplies off the shelf.

This includes the Swedish market where domestic buyers are behind in their programmes and have come to the market too late. As a result, all the planing machines are booked solidly up to the holiday which is due to start on July 7, and many will not get their orders fulfilled until after that period. In the longer term, the prospect looks uncertain in the Swedish market where, as with nearly everywhere else, economic activity is still reducing.

The redwood market has been less affected than whitewood from oversupply, and prices have remained more robust. But within the UK, prices have dropped due to strong competition between importers and the desire to turn stocks back into cash. In most cases selling prices have not been reflective of the replacement costs, which are generally at higher levels.

Whitewood volumes

Although the same control measures are being taken in the whitewood market, the sheer volumes in circulation have done far more damage, and so recovery is expected to be much slower. Increased production in Germany and Sweden at a time of falling demand in both the US and Europe helped force prices down by almost 25% over the past 12 months. With a high proportion of the raw material coming from storm-damaged logs, some mills, undaunted by currency exchanges and increased running costs, simply forced as much volume into the market as they could. This affected importers’ stock values, and other producers buying fresh-cut higher-grade fibre who were forced to sell their production at a loss in order to compete.

There are some small signs that a recovery in the whitewood market is possible: one contact reported a slight increase in the Continental markets of around €5/m³ for CLS, while another spoke of increased demand from the Japanese market, although he said prices there were still an issue.

Significant volumes of short spruce logs have been sold to Swedish pulp manufacturing plants rather than sawmills, which may take the pressure off stud prices and create some opportunities for other producers like East Coast Canadians to ship more CLS.

Housing market

Closer to home, the general economic situation in the UK has led to a decline in confidence within the trade, and a great amount of uncertainty. The recently exposed weakness in the banking system has resulted in a stranglehold on mortgages to first-time buyers, which in turn has slowed down housing sales and brought new builds almost to a standstill. Share values of the UK’s national housebuilders have plummeted by an average of 60%, but some have fared far worse than others and there are worries about the financial gearing of the industry. This situation has some similarities to the early stages of the current housing crisis in the US, which has now developed into a situation where many housebuilders have gone for Chapter 11 bankruptcy protection.

How the downturn in UK housing will affect the softwood market might not be as straightforward as it first seems. Many new housing developments are already using engineered wood components such as

I-beams, so it is credible to argue that the solid joist market has already gone through a period of significant change and will not be as vulnerable to this downturn as in the past. However, the wide use of CLS in timber frame construction will come under further pressure as off-site frame manufacturers experience a slowdown in growth due to problems in the volume housing market.

Softwood decking

Demand for softwood decking has continued to disappoint traders, but timber cladding for municipal and industrial use has enjoyed steady demand. Shortages in the supply and rising costs of cedar and some hardwoods have increased the rate of growth in the modified wood market. Architects are beginning to specify this new generation of products more readily as they are becoming aware of the high performance capabilities.

In spite of the problems associated with the housing market, the demand for bespoke joinery products has remained firm, and companies trading in laminated and finger-jointed specifications report more interest from manufacturers looking for more stable and reliable products. Importers and merchants specialising in more value-added technical products seem to be achieving better trading results than those tied to the most basic commodity softwoods. In spite of some worrying times ahead, some sections of the softwood industry remain more optimistic than others, but everyone is preparing for a difficult time ahead.

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