Summary
¦ The market is balanced but still driven by supply.
¦ Sawmills’ profitability has improved.
¦ Raw material prices are rising more steeply in Sweden.
¦ Sweden has lost the competitiveness offered by last year’s exchange rates.
¦ North Africa is becoming an increasingly important market.
Swedish traders are generally satisfied with current business and the supply/ demand balance but their optimism is tempered by awareness of the fragility of a supply-driven market and concerns over raw material supply.
Sawmills report good order books and signs of improving demand, although the UK presents a mixed picture.
“We have a good stock balance, prices have strengthened and demand is gradually picking up,” said one sawmiller. “Production will not increase that much so we will continue to see a balanced market.”
Another said his company was “extremely well sold on our current position”. “We don’t really have any surplus items so we’re running on a good order book across all markets, including the UK,” he said.
Another shipper said UK imports seemed to be slowing slightly and his merchant and DIY customers were reporting that sales were lower than this time last year – perhaps a result of the freezing weather at the start of the year.
Another contact was fairly positive about the UK. “It’s from a low level but demand is gradually picking up a bit and we’re still competitive enough to maintain market share, although I don’t think it’s possible to increase it further.”
Sweden’s housebuilding sector is picking up slightly but it is the renovation market – which accounts for a large proportion of sawmills’ business – that has been steady throughout the recession, while for exports, north African countries are now established as important markets and major drivers.
“The UK, to some extent, is having to follow the other markets,” said a contact. “In the past, our exports were very much on the UK scale but today we’re going outside Europe. The north African markets are very strong.”
Another shipper agreed: “It’s a long-term market. They have young populations, relatively good finance because of oil revenues and they build houses at a tremendous pace.”
Note of caution
While contacts were optimistic about the market, they all expressed an element of caution, acknowledging that this is in the context of the longest period of supply-driven business that most traders have ever experienced.
“We’re positive with regards to the supply/demand balance but not in terms of consumption. The market is still totally supply-driven,” said one shipper. “If there is a sleeping capacity in the industry then it could destroy the fragile balance.”
This made him cautious about medium-term prospects.
“I don’t think the market is as strong as some sawmillers think it is. If you look at it in the medium term it depends entirely on how much we’re going to produce and no-one can really answer that.”
Currency fluctuations mean Sweden has lost the competitive advantage it had last year when the euro had strengthened and the krona weakened. Exchange rates are returning to their historic positions but, nevertheless, profitability is generally improving for Swedish sawmills.
“We’re reporting some profitability, which we desperately need to survive. We’ve been without it for too long,” said a shipper.
And this newly-restored profitability could easily be dented by the rising cost of raw material, which is increasing globally but more sharply in Sweden. This places the country at a disadvantage in export markets.
“The increasing price of raw material is worrying everyone,” said one sawmiller. “It’s rising rapidly and it’s eating into our margins. The question is, how can we compensate that?”
He was not the only one to suggest that, in the long term, if the costs are not reflected in sawn timber prices some mills would struggle.
Behind the rising costs is a log shortage, which shows little sign of abating.
“It’s not getting any better,” said one shipper. “We have two sawmills at the moment which are hitting the red button. It’s almost a continuing fight out there to procure logs.”
Although mills are crying out for logs one shipper cautioned that sawmills’ desperation for raw material could easily upset the market balance.
“We are paying quite a lot in raw material costs in all countries and that will stimulate supply, but that’s not entirely positive if we have a fragile supply and demand balance based on restricted supply.
“I’m a little worried that producers are happy to pay so much more for log cost increases, and that goes for all supplying countries, but probably the worst affected is Sweden. We should learn from history that when we pay out too much and expand too quickly it will hit us some time.”
One sawmiller warned that the log shortage on top of already reduced production could lead to shortages in the third quarter after the traditional Swedish shutdown in July.
“We have a very low stock, we have a big order book to get out, then we go straight into the third quarter and we’re closed,” he said. “That could start to cause chaos.”
It is too early to be doing business for the third quarter but sawmillers are mindful of agreeing prices that will be eroded by steeper log costs, and ensuring they have the stock.
“We need to be very sure in terms of what we’re paying for logs,” TTJ was told. “We don’t want to go to the market yet. We need to be able to gauge where we are. Our number one priority is to ensure that we can ship what we’ve sold for this period. It’s pointless selling for the sake of selling and letting your customers down.”
Prospects for 2011
While the market into the third quarter is still uncertain, several contacts were counting on a more demand-driven, and stable, market in 2011, and perhaps even by the end of this year.
“We are optimistic demand will improve next year, especially because housebuilding is rising in Europe, and the US is gradually getting back to normal housebuilding activ-ity. There is not much room for Canadians to increase production. We think it will be a good, steady market,” said one contact.
However, another said hopes of a stronger market had been thrown into doubt by Greece’s financial turbulence and spending cuts by governments.
“Many countries have a huge need to save on public spending so there’s uncertainty as to what impact this will have on demand in the coming year,” he said.
“We hope the markets will recover in 2011. We certainly would have believed that a month or two ago but now with the situation of the PIGS countries [Portugal, Ireland, Greece and Spain], nobody knows.”
But although the market is difficult to predict, the current stability is a vast improvement from May 2009. “We’re not through it yet but if we turn the clock back to this time last year we weren’t making money, we were closing sawmills, making redundancies and operating short working hours.”
