With the end of the year in sight, the UK timber industry is faced with budgeting for 2013, and while traders attempt to gauge what customer demand is likely to be, it is equally important to assess the capabilities of their suppliers.
In terms of supply, 2012 has proved difficult for many sawmills as log prices have risen consistently and sluggish demand has kept selling prices lower than most mills can afford to sell at. This scenario is not new, and in many cases buyers are hardened to what might be regarded as ‘the same old song’ or the suspicion that exporters are continually ‘crying wolf’.
Now the situation for sawmills is turning critical, and the European whitewood market is in dire need of a big shake-up. Overproduction in Sweden, mainly by the large forest products groups, has impacted on the industry to such an extent that nearly all carcassing mills in southern Sweden are reporting losses on each cubic metre they cut.
As one contact described the situation, "production must be reduced. Anybody talking about increasing volume to lower their unit costs has lost their marbles". And there is widespread agreement for this assessment across the whole supply chain, from agents and importers to merchants and trade organisations.
There are indications that Swedish log prices are softening a little, but one contact pointed to the fact that mills struggling to maintain cash flow are now facing another growing problem, and that is credit. Forest harvesting companies are reining in logging volumes because the sawmills they supply are losing their credit insurance status. Harvesters cannot supply sawlogs without some form of payment guarantee, and that is something many mills simply can’t produce. As the situation is continuing, there are several warnings across the industry that mill closures are certain to occur in the first quarter of 2013.
For whitewood mills in Latvia, problems lie with log costs and reduced availability. After a reasonable and improving trading year with UK buyers, mills are now faced with shortages in log supplies that will lead to a cut in output for at least the first half of 2013. With this in mind, producers are set to raise their selling price levels by March or April 2013 and do not expect this move to generate market resistance.
Latvian mills and their other Baltic counterparts are confident that they will sell everything that they can cut into one market or another against the background of expected production cuts across northern Europe.
Baltic balance
At present, inventory levels are low at many Baltic mills but, due to slow demand from all export markets, there is a temporary, albeit unsatisfactory, balance between supply and demand.
One Latvian group confirmed that 2012 had been a better-than-expected year and they had sold significant volumes for January and February shipments into the UK. But they also spoke of high prices at log auctions that were held in the last week of November, where increases of between 5-10 Lats were obtained on logs of all diameters. As these work through the system, sawmilling costs will rise.
In spite of overproduction, Swedish mill inventories are reported to be on the low side, and if cutbacks are implemented from January onwards, then shortages of sawn softwood will be seen in all importing markets, and the UK will be no exception.
One quay stockist commented that prices had started slipping in the UK market due to fierce competition, and he would welcome production cuts to keep prices firm. As demand in Britain is currently weak, there is also growing competition among home-grown mills – especially as Irish mills are making cheap offers while prices are under downward pressure.
Redwood markets have remained in a more stable position and cutbacks in Finnish production over the last two to three years have helped keep prices firm. Overall, the country’s output is now running at an average of 9.5 million m3 per year with around 6 million m3 going for export. Between 2006-2007, Finnish softwood output was well over 12 million m3.
In the first nine months of this year, Finland’s exports of redwood strengthened by 3.75% against the same time last year to just below 2.35 million m3. This compares with Sweden’s figure of 3.7 million m3, of which 465,000m3 of pine was shipped to UK buyers.
In spite of cutbacks, Finnish producers are still battling with reduced demand and continuously rising running costs. This is impacting other products as well as softwood, and weak demand for plywood, coupled with fibre shortages, has led to planned reductions in Finnish production for the first half of 2013. One large producer is considering imposing curtailments of up to 90 days at four major plywood mills. The proposed shutdown will be reviewed if the market improves, but at current levels it is likely to be implemented.
In contrast to the Nordic region, Russian softwood production is expected to rise next year from an estimated 29 million m3 in 2012 to 32 million m3 in 2013. Exports are also predicted to rise by 13.5% to reach 22 million m3. Housing construction in the Russian Federation rose by just over 1.25% last year, according to statistics, and the government projects housing growth to continue through to 2015.
Temperatures are currently falling in the producing areas of Russia, but during October, milder wet weather hampered log supplies, and cutbacks in exports from Archangel were reflected in lower stock holdings and rising fibre costs. Mills in all regions are thought to be losing money and, in common with the Swedish krona, the final converted Russian currency, the rouble, has gained in value against both the US dollar and the euro, making foreign invoice receipts worth less to the shippers.
The pattern of Russian trade has been continuously changing over the last decade, and now there is a greater emphasis on selling to Asian and former eastern bloc regions with emerging economies, rather than to stagnating economies such as western Europe’s. While Nordic mills are concentrating on North Africa, Russian traffic has started moving into areas such as Uzbekistan, and volumes to China in both sawn and round timber are still growing. As the US takes more fibre from Canada, Chinese buyers are likely to press Russian forestry sources even harder to increase supply to make up for the resulting shortfall in cheap Canadian wood supplies.
Low UK stock levels
UK stock levels are far lower than they were historically when large importers like Montague L Meyer Ltd, May & Hassell and Mallinson Denny were each bringing in multiple cargoes every month from Exportles. Today, a reduced number of terminal operators bring in Russian cargoes, and some volumes are containerised and sold in 40-50m3 lots as opposed to full shipments. Less redwood is now on offer, and many merchants are accepting whitewood as an alternative – especially in sideboards such as 22/25×150/175/200mm.
It is an indication of Britain’s improved position in the European market that shippers are selling to UK buyers on a forward basis. By comparison, agents serving other markets on the Continent report that buyers such as Holland and Belgium are sticking to low stock levels with much shorter-term, just-in-time buying cycles.
Shippers are still keen to trade with UK importers, despite the country’s serious economic problems, but price will become more important than ever before if supply is to be maintained. Currency might provide a vehicle to offset price increases if sterling were to strengthen, but at a time when British industry needs export markets, this could have a detrimental effect on the balance of trade. With interest rates fixed by the Bank of England at 0.5% it is unlikely that currency investors will be attracted to sterling, and therefore its value is unlikely to increase.
The capabilities of suppliers will be governed by many factors, and if cuts in production are achieved, then importers and merchants in the UK and Europe will need to dig deeper in their pockets to attract offers from shippers. If they are not prepared to pay the higher prices, shippers will either sell to other markets, or face closure.
