Ireland’s economy is continuing on its upward trajectory, boosting business and consumer confidence as it goes. The country’s Economic and Social Research Institute (ESRI) puts growth at 5% this year and is moderating that down to 4% for 2018 but, even with that reduction, Ireland’s economy is becoming the envy of its EU neighbours. Unemployment is close to 6%, down from the 15-16% it hit during the depths of the recession and construction is recovering, albeit slowly.
“Some key sectors of the Irish economy are expanding faster than others,” said an Enterprise Ireland spokesperson. “The skyline of Dublin is full of cranes and large contracts are moving to site. Private and public housing numbers are slowly starting to grow but there is fast growth in repair, maintenance and improvement (RMI).”
“All the improvement in the economy has not flowed back into the new homes construction sector yet,” said a major sawmiller. “As a result, there is talk about house prices rising by 20% between 2017-2020, purely driven by lack of supply.” In fact, all the contacts for this report agree that while demand for housing is strong, newbuild construction is some way off the pace and that figures being announced by government – anything between 15-20,000 house starts this year – bear little relation to what is happening on the ground. Statistics are hard to pin down because they are measured from different parts of the chain – from the commencement notice in some statistics and from connection to electrical supply in others – but commentators suggest the actual figure is more like 5,000-8,000.
“Construction should account for about 12% of GDP and went as low as 2-3% [during the recession],” said one major timber merchant. “Right now we’re still below 6% so we’re not where we should be at this stage.”
Contacts also agree, however, that while the country may not be building enough homes to cater for pent-up demand, the construction sector itself is not yet robust enough to support faster growth.
“The infrastructure in terms of trade, finance and land is not in place,” said a major sawmiller.
“The construction sector doesn’t have enough people on the ground and we don’t have the alternative prefab solutions up and ready yet, so I think the numbers we are producing are probably what we are currently set up to do,” said a merchant, while another pointed out that new house starts are currently very Dublin-centric.
Timber and builders merchants have focused even more on their core RMI markets as they’ve waited for the slow construction sector recovery.
“RMI is very important to our business and during the recession we reorganised our branches to enable them to cater better for that sector,” said one major merchant. “Shops and showrooms were upgraded, new staff training programmes were developed and we increased our marketing spend.”
The Irish government also put some muscle behind the market in the shape of the Home Renovation Scheme, which enables homeowners or landlords to claim tax relief on RMI work carried out by tax-compliant contractors and that is subject to 13.5% VAT.
“It’s been a huge factor in the growth of RMI business,” said a merchant, adding the sector is growing at about 10% per year. Irish-grown and processed timber accounts for as much as 80-90% of merchants’ timber stock and they’ve seen sawn prices increase as mills have sought to match the levels they can achieve in export markets.
“The mills would have been achieving higher prices in the UK while times were good so now they are starting to put more volume into the Irish market they have increased the price to meet the expectations they would have had in the UK market,” said one major merchant. “We have had three price increases in the last nine months, which is unprecedented.”
He added that the first two increases had been “systematically” passed on to customers but that the third had proved more problematic.
“Customers realised there would be another price increase on the way and made significant bulk purchases, choosing not to pass on the [third] price increase to their own customers,” he said.
While currency exchange rates are not a factor in the domestic price increases, at least one merchant has concerns that the depreciation of sterling – 18% since late 2015, with the biggest fall coming immediately after the Brexit referendum – could have an indirect impact on his business.
“We could end up having products ‘dumped’ on the Irish market and moving at a price,” he said.
While confidence in the domestic economy is pretty high, there are plenty of nervous glances across the Irish Sea to the UK and what one commentator referred to as its “softening economy”.
In Export Market Watch, a report released by Enterprise Ireland in the summer, the organisation noted that 45% of its construction companies had reduced their exposure to the UK following Brexit and that almost seven in 10 companies surveyed now view the Eurozone as providing key opportunities for growth.
Concerns about UK
While some commentators are phlegmatic about changes afoot in the UK, others are extremely worried.
“The UK market is still very busy but then again nothing has changed yet apart from the currency depreciation,” said one sawmiller. “But we are very concerned. We think the UK public is unaware of the impending price increases that will certainly happen in all sectors due to tariffs, administrative costs and increased transport costs that will certainly occur.
“This is like the calm before the storm,” he continued. “It will be like a return to the dark ages, filling in customs declarations and paying handling agents for both UK importers and exporters. It will be useless for business.” Another sawmiller shared his concerns regarding the potential return to border controls, particularly between Northern Ireland and Republic of Ireland.
“We have a unique situation in Ireland and there is huge concern that it [the border] is not being given the level of attention it should. On the one hand we are being told there will be no border but on the other, nobody has been able to describe what this new world will look like.”
Setting Brexit aside – if that is possible – even a flat UK market remains of huge strategic importance for timber processors operating in the relatively small Irish economy and it is still an attractive proposition. In fact the statistics published by the Timber Trade Federation in November show that Ireland achieved a softwood export growth rate of 17% between January and August this year. Irish timber now accounts for 6% of the UK’s softwood imports by volume.
“A minimum of 95% of the Irish sawmills’ output goes to the UK – it really is the only show in town,” said a contact. He added that the similarities between the fibre, along with the fact that many of the main players had a foot in both Irish and British camps – Grafton Group, for example – made the relationship even closer.
“There are so many crossovers that people don’t even begin to understand the extent of it,” he said.
“We’re trying to increase market share in Ireland but so is everyone else,” said another sawmiller. “Our UK-based customers are very important to us in terms of volume sales. Our exports have increased by 15%, although the percentage [of overall production] has decreased by 7% as we continue to try to sell domestically.”
He added that investment in technology had enabled the mill to increase output by 20% with no change in hours.
Another contact said Irish processors still regard the UK as “a home market”.
“We’re going nowhere,” he said. “We have to compete. The [UK] market will deteriorate but it’s a huge market and we must fight for our share. Something like 80% of Irish timber goes to the UK and it only accounts for about 10% of its needs. The UK market may decrease but the Irish percentage share has to increase.”
“There has been a lift in construction in Ireland but it is small relative to the overall production of the industry,” said a major sawmiller. “It’s not something that is going to change the industry’s approach to exports for a very long time.”
“Exports have risen on the back of increased production and it looks set to continue,” he added. “There is greater availability of logs and increased demand from the market so processors – notwithstanding their concerns about Brexit – should be optimistic going into 2018.”
At the time interviews for this report were carried out, in early and mid-November, Irish mills were experiencing strong demand across all sectors and were looking to be busy right up until the traditional Christmas shutdowns.
Some mills have added shifts to cater for demand while others have not had to trim their sails as they have done in the run-up to Christmas in previous years.
“Normally you would be coming into November and thinking about cutting the hours and doing winter deals and that’s not happening,” said a sawmiller, adding that sawn timber is coming straight off the mill, onto lorries and out of the yard.
“We should have started to slow down in the last quarter but the bigger boys [in the UK] are beginning to build their stocks and are buying away,” said a contact at a fencing mill. “The same thing happened last year – we went into Christmas with very low stock and we’re going to do that again.”
Low stocks could equal tight supply of sawn timber and longer lead times – particularly in the event of an early storm – and, in combination with higher raw material and production costs, they will certainly result in price hikes. Mills that were sold out by the first week of November are very confident they can achieve price increases in early 2018 – some say in January, while others think February/March is more likely.
“I think you could see the market moving from February,” said a contact. “And it will need to be led by imported Scandinavian supply.”
Price rise size
There is less clarity about the degree of the price increase. This time last year mills were equally keen to push them up but, in the end, achieved considerably less movement than they had hoped for.
“I don’t think prices have reached a ceiling yet,” said one major sawmiller. “Other building materials have increased in value and timber has lagged behind for a long, long time. No matter where it comes from, Ireland, the UK or Scandinavia, the overall price of timber has to increase by another 10-20%. That’s the longer-term view but in the shorter term we haven’t reached the ceiling yet.”
Another sawmiller agrees the price increases will be “in smaller tranches” rather than in a single big hit.
“Customers prefer that because they can build the increases in,” he said. “But they’ve all been warned that the price increase is coming, which is probably one of the reasons they’ve all been ordering now before Christmas.”
“This is the first time for a long while that the word ‘supply’ is an important factor,” said another contact. “People are starting to look at supply chains rather than just price. You might have the right price but if you don’t have access to the product it’s not of much value to you.”
Some Irish sawmills brought greater production efficiencies on line earlier this year and others have them in the pipeline for 2018. This increase in production capacity, coupled with strong demand from timber buyers, has caused a tightness in log supply, with one sawmill noting a shortage of 3.7m pallet timber.
“I have the right material, I just don’t have enough of it,” said another sawmiller. Coillte upped its volumes to 1.75 million m3 this year but its auctions and sales events finished several weeks ago, so most of its material was already contracted before November.
“Prices would have been pretty stable throughout the last two quarters,” said a spokesperson – although it’s worth noting that other contacts commented on log prices increasing “considerably over the last six to nine months”.
Coillte’s spokesperson also confirmed that Hurricane Ophelia had not caused the damage that had been feared. Many Irish businesses put up the shutters on October 16 and Coillte’s forests were closed for the day.
“We had pockets of damage but nothing significant and certainly nothing like we had with Storm Darwin in 2014,” he said. Other contacts agree that, apart from losing a day’s business, Ophelia has had little impact. One merchant noted a spike in plywood sales ahead of the hurricane’s arrival but no such increase has yet been detected in the fencing market, either by processors or merchants.
