The UK softwood market was generally buoyant during the first nine months of 2014, with an increase in demand compared with the same period last year. Solid timber consumption continued on a rising trend from its 2009 low of under 7.5 million m³, and last year consumption was just shy of 8.5 million m³. Estimates for this year predict that consumption will rise to well over 8.75 million m³, even nudging the 9 million m³ mark.
The stronger demand drew in higher volumes of imported softwood, which increased by almost 21% in the first half of the year. Although there was a slight easing in the growth rate during July, overall figures for the first seven months still stayed well ahead of 2013 as a higher level of confidence swept through the trade.
The main beneficiaries of UK growth were the Swedish and Latvian mills, which increased their export volumes by around 17% and 30% respectively, with Sweden as the main supplier taking 45% of the market, and Latvia in second place with 14%. Both Sweden and Latvia are the two main suppliers of strength-graded carcassing to the UK.
Log supplies in Sweden are currently plentiful, and in the south – which is predominantly a whitewood spruce area – September levels were reported to be 40% higher than the same time last year.
Currency movements helped make imported softwood more competitive against home-grown productions, and many merchants started switching from home- grown to imported supplies. However, a gap of between £12-15/m³ remains, and those merchants still trading on price alone continue to be wedded to C16 from British and Irish Republic producers. There was an expectation that some home-grown producers would drop kiln-dried grade-stamped prices by £5/m³ during October as competition between mills intensified, and this would open up the gap against imported wood again. Meanwhile, fencing materials remain at premium prices, and for products such as unseasoned battens, the prices are higher than top quality carcassing.
Home-produced softwood volumes have grown over recent years, and are forecast to be closer to 3.7 million m³ this year from 2013 levels of just over 3.5 million m³, with further growth expected in 2015.
Sterling’s performance has improved against most currencies this year, but its recovery against the Swedish krona has been the strongest and most significant, gaining over 13% on a rolling 12 months (measured at the end of September). Over the same period, sterling rose by just over 8% against the euro, and this 5% differential favouring Swedish exports has made it harder for Baltic mills to compete.
Latvia looks to UK
In spite of an exchange rate disadvantage, Latvian sawmills have still looked to the UK as a favoured market and have been active in offering increasing volumes for prompt and last quarter shipments. The mills have also been flexible on specification, often matching buyers’ exact requirements and foregoing extra premiums for longer lengths.
In Sweden, several factors are contributing to a build-up of supply. Although the UK market strengthened, other key European markets did not follow suit, and this was also the case in significant export markets outside Europe. In Japan, for example, demand was significantly lower than in 2013 and importers’ stocks reached much higher levels.
As a result, high whitewood production in Sweden at a time of falling global demand increased the downward pressure on prices during September and October. The large producers reacted by cutting their margins rather than their output in the hope of gaining increased market share. This move was particularly noticeable on the Dutch market in early October, where suppliers wanted to stimulate and secure more volume at almost any cost.
Some UK merchants and importers commented that demand for solid timber started to fall away in some parts of the country during October, and buyers had started to exercise caution when making forward commitments. Most traders appear to be ‘ticking over’ at a satisfactory level, while some are still flat out. As one merchant said: "General building product sales are pretty good, but with the winter months in sight we must be careful to avoid over-stocking". Another said price reductions would have a negative effect on stock values, and advised suppliers to refrain from pushing cheaper wood into the market, particularly at a time when inventories are full.
To put supply and demand in perspective, over the last 12 months the trade has seen yet another cycle of ‘feast and famine’ with either a shortage of carcassing or a glut. During the autumn of 2013, mills were screaming for fibre and prices were firming, then during the first quarter of 2014 when saw logs began arriving at the mills, production was ramped up. Prices from that time onwards began to soften gradually month-by-month as import volumes started rising. Now many inventories are full, and it is only by controlling mill output that the market can be kept on a stable footing. One agent said traders needed to keep a watching brief on the strength of actual end-user demand, as quayside volumes could rise too much too quickly if demand weakens.
Whitewood overproduction
Once again, the softwood market has come under pressure from overproduction of whitewood by the larger Swedish sawmills.
This situation will continue to impact the market, but does not represent the full picture in Sweden where many mills are continuing to offer high quality, good specifications and service without relying exclusively on price.
In fact, one of the most pressing issues affecting the UK trade is logistics, as the transport situation has not eased, and ex-quay deliveries are being hampered by a shortage of transport following rationalisation and shrinkage during the recession, which saw many hauliers cease trading.
In the redwood joinery market, production was more aligned to demand and prices remained firm. The value of redwood imports to the UK grew by around 26% in the first seven months of 2014 as the market gradually strengthened.
In the northern area of Sweden, where the majority of the redwood production is joinery quality, volume growth over the past 12 months increased by 13% against the previous rolling period, but mill inventories only moved up by 3%. In September alone, production increased by 15% from the same month in 2013, but stock levels rose by a lesser amount of 8%, indicating that the increasing volume was moving back out through the gates as sales.
Finnish sawn redwood exports during the first seven months of the year amounted to just under 2.2 million m³. Egypt was the largest receiver, taking almost 560,000m³, and the UK was third, importing approximately 240,000m³ – a 2% increase from a year earlier. Algeria took second place with an import volume of 282,000m³. Finnish log costs started rising in June, and in August they advanced by more than 4% from prices in July. With rising raw material costs in the background it is likely that prices will need to rise still further before the end of the year.
Redwood markets are not without some pressure and, in spite of stronger demand from the UK, Finnish redwood exports to China weakened in the period to July by 23%, and were also down from last year. Exports to Japan also decreased by 19% – a market which also shrank by 30% for whitewood.
Softwood stock levels in China have reached a peak, and supply is now in excess of demand with prices weakening and wiping some of the value off stockists’ inventories. This is also the case with saw logs where stock levels are now over 50% higher than they were at the turn of the year, and current prices of fibre from key supplying nations, including Russia, North America and New Zealand, are falling.
Last year, Chinese buyers diverted supplies and inflated raw material prices by bidding higher prices for logs than the local mills in the Baltic and Nordic regions could afford to pay. This had the effect of disrupting production and threatening the employment of many workers in the forest products industry, so the slowdown in China’s log imports may come as welcome news to sawmills in Europe as it should reduce competition for fibre and go some way towards improving saw log availability.
