Reduced availability of raw material at some mills has brought production levels down to the point where it is unlikely they will catch up on existing contracts before the end of the year. If the supply situation is not corrected soon, the problem could extend well into the first quarter of 2007, taking some mills completely out of the market for the foreseeable future.
For mills working on existing export contracts with significant volumes still left to fulfil, the situation has reached a critical stage. If they can’t find enough logs to keep production at an economic level, then cash flow will be affected to a point where they will be unable to meet their running costs.
As demand for fibre has strengthened, so log prices have risen. In addition to the problem of high log prices, shippers with contracts dating back too far cannot now make a profit because their selling prices have become outdated. Mills that are able to offer volumes on a forward basis have recently raised their selling prices of sawn whitewood by £10/m3 due to the increased fibre costs.
As an alternative source of raw material, many Baltic mills have relied on Russian logs to supplement their production and to help even out costs. But with rising demand and improving returns from the home market, Russian log prices are rising week by week. There is also the problem of export taxes being sought by the Russian government and that, combined with a policy to export processed products, is making Russian fibre a less attractive option for Baltic sawmills.
Illegal logging
Furthermore, there are growing arguments over illegal logging in parts of Russia. This has been highlighted in a recent clash between Greenpeace and members of the Finnish Forest Industries Federation over allegations that illegally felled Russian logs are being transported over the Russian/ Finnish border. Greenpeace makes the claims in its report Partners in Crime: A Greenpeace Investigation into Finland’s Illegal Timber Trade with Russia.
With the UK trade’s requirement for accredited softwood, Baltic shippers who are importing cross-border fibre run the risk of being excluded if sources are not identified through a chain of custody. As well as importing sawlogs, Latvia has been an exporter of logs to the Nordic countries, and this external demand has been another factor in driving up log costs even higher for the local mills.
Although high fibre costs and shortages have contributed to a rise in selling prices, one comforting factor for Baltic shippers is that Sweden faces similar problems.
Some of the Swedish sawmills now working on the last volumes of spruce logs from wind-thrown stockpiles, have recently discovered much higher levels of degrade and discolouration than they anticipated. This has caused the mills to re-evaluate production projections, while at the same time creating an immediate demand for freshly felled logs.
Swedish prices
The revised log situation coupled with strong international demand, has led Swedish mills to increase the price of carcassing quality whitewood by the equivalent of a further £10/m3. While prices were expected to continue climbing during the last quarter, this sudden move has taken many agents and importers by surprise, and has swept away any doubts that buyers might have had about the need to buy forward.
In the past the Swedes and Latvians have blamed each other for undermining the market price, but now global demand and fibre shortages make competition for sales between the two countries almost irrelevant. The way in which these factors have affected the sawmills in both the Nordic and Baltic regions has resulted in similar price structures.
Overall prices for dry-graded carcassing have risen this year by approximately 25%, but at what level they will plateau remains to be seen. If fibre shortages, reduced production and global demand continue to follow current patterns, then a further increase of 5% is not inconceivable before the end of the year.
This rising price trend has been met with alarm by some merchants in the UK, particularly those locked into long-term agreements with national housebuilders until the year-end. Now they are finding themselves in a very precarious position where cost prices could soon exceed their selling levels.
UK importers with landed volumes have, on the other hand, reaped the benefits of rising stock values. In many cases, importers have cushioned the blow to their customers by buying far enough ahead, and have eased prices up more slowly than the shippers.
For the past 15 years softwood prices have remained almost static, whereas inflation has continued to rise at a minimum annual rate of 2%. Prices have already risen 25% this year and, with a further increase of 5% likely in the near future, the price of timber is set to reflect its true market value once again. n
