Summary
¦ European forest owners have increased harvesting.
¦ Trade between the Baltics and the UK has increased.
¦ Carcassing prices have reached a plateau.
¦ Forward purchases are slowing, not helped by exchange rates.
Production control has once again become a critical issue in the softwood market, and sawmills across the Baltic region are only too aware that with current high log prices, more fibre is likely to become available.
Forest owners in most northern European producing countries are taking advantage of satisfactory financial returns from harvesting and selling higher volumes of logs to the mills. Good harvesting weather has also helped and one exporter commented that forecasts showed promise of better than average conditions in the coming months, allowing increased felling activity in the first quarter of 2011.
This has led to a steady increase in imports from the Baltic states to the UK over the second and third quarters, particularly from Latvia.
Market balance
Currently, the trade feels supply and demand are in balance, but with demand now showing signs of slowing, it would not take much to create an oversupply of sawn softwood, particularly in spruce.
In the carcassing market, forward prices have plateaued, albeit at higher levels than the trade is used to, but to sustain the market, supply has trailed slightly behind demand. There is some concern that some mills may be tempted to take advantage of the improved log supply and increase production. This would leave goods unsold, which could force prices back down and affect inventory values. Over the last few years most producers have taken steps and developed strategies to reduce production, so it is unlikely any serious gluts will appear in the foreseeable future.
There is some talk among the Swedes that whitewood prices will increase during the first quarter of next year, but unless there is a sudden improvement in general demand, most people in the industry believe that a peak has already been reached.
In the redwood joinery market, which is centred in Sweden and Finland, there are still shortages and backlogs, leading to late shipments, as well as isolated price increases in some specifications including board sizes such as 25×150. But in the Baltic states the vast majority of mills have cut their pine resources to carcassing quality and fencing and therefore those prices follow the whitewood trend.
In the UK, there is a strong desire among importers to achieve stability, with prices holding firm rather than rising unrealistically, and adequate supplies to satisfy the market’s requirements.
Slowing demand
Although merchants have reported some busy periods during the summer months, several exporters say UK demand has been slowing down. As the trade is now approaching the last quarter, importers and merchants will strive to keep a tight rein on their stock levels.
Agents are witnessing a slowing of forward purchases, and volumes are leaning to the conservative side as buyers are showing signs of uncertainty over demand. This applies not only to the UK market, as the economic situation is cooling demand across the rest of Europe.
As far as UK importers are concerned, currency exchange rates still have a great effect on prices, and sterling’s continuing weakness against the euro makes forward purchases a gamble. Although the euro has come under pressure due to difficulties with euro-zone economies such as Greece, the pound has not gained any significant strength against the euro when viewed over the long-term average.
This has made it difficult for shippers to sell in firm sterling on a forward basis because exchange rate adjustments have been liable to swing in any direction. Also, the costs of covering currency options have become more expensive, particularly for small amounts.
Sterling’s decline
The pound’s value against the euro has declined steadily over the past 10 years, with a notable drop in the last two years. Figures are based on the average inter-bank exchange rate. The mean average exchange rate over the 10 years is €1.40973/£1, showing sterling’s average for the past 12 months is 18.46% down. In the week ending September 24, sterling stood at €1.173/£1, 18.8% below the 10-year average.
A similar picture emerges when comparing the pound and Swedish krona, but the gap between sterling and the Canadian dollar (which has strengthened internationally) shows a disparity nearer to 30%.
Looking ahead, shippers are in agreement that prices will remain firm, saying they would prefer to cut production or even close rather than get squeezed on price. As long as log prices remain at their current high level, fibre will be available, but if they drop, felling will become restricted and a new round of timber shortages will ensue. If UK demand falls by any great extent, it will have little influence over shippers’ prices. They will concentrate on expanding sales into other markets instead.
