While July was a busy month for softwood traders, sales have yet to fully compensate for the severe downturn that hit the trade last September. It began with the fuel blockades, then flooding and continued through the first quarter of 2001 into the foot and mouth crisis.
Strong demand for housing has led to soaring prices and the recent fall in interest rates is expected to fuel this. Builders and developers have been reporting substantial profits but the prices and profit margins in the UK timber sector have remained almost Dickensian by comparison.
Softwood has never been so cheap in relation to building costs, yet it is from within the trade itself that such a low value is put on the product. The pressure to keep prices at rock bottom levels has been dictated not by the end user, but by the desperation of timber companies to push for market share.
In the supply markets, while Baltic shippers are struggling against the punitive climate caused by the sterling/dollar exchange, the Swedes have continued to take advantage of the favourable conditions created by an exchange rate of more than SKr15/£1.
Oversupply, particularly from Sweden, has continued to dog the softwood industry and it is only the summer shutdown in Scandinavia that has turned off the tap. This has left a gap in the prompt market for those exporters who can offer good specifications, and in return they have been seeking firmer prices.
Sterling has been riding high against the Swedish krona and it has been a major influence in setting the price of redwood and whitewood. If the exchange rate were to fall rapidly to previous levels of SKr12.80 for example, import prices would rise dramatically. The short term nature of the buying cycle in the UK would mean price rises would quickly show themselves in importers’ stock costs.
Timber merchants
However, prices to industry and the end user would take longer to filter through as many timber merchants have been in the habit of entering into long-term fixed price agreements with their customers. This would create a squeeze on timber merchants’ margins, which in reality have been supported mainly by lower buying costs rather than by any genuine price increases. In fact, the price of timber sold to the construction industry has remained almost static for the past five years, save for the occasional decrease. It is as though the trade has forgotten the words ‘price increase’.
One trader made the comment that the softwood industry is still predominantly turnover driven, and it is too weak and defensive to ask customers for more money, hence there is always a tendency to attempt to squeeze suppliers to the limit.
And squeeze is the operative word when assessing the situation in the Baltics, as reports outline severe cutbacks within the industry, with many smaller mills closing altogether. Once again, log supply has become an issue, but this time there are several factors occurring at the same time which are creating shortages at many sawmills.
In Latvia, storms during July wreaked havoc, with high winds and torrential rain affecting power supply and damaging property. The heavy rainfall has also swamped forest extraction, leaving felling machines bogged down in the forests.
While hot and humid weather persists between the storms, the authorities have imposed entry restrictions and logging bans in some areas as a fire precaution.
The weather is creating two extremes on a daily basis but they are both having the same effect on forest extraction.
Sap stain threat
The combination of high temperatures and high levels of humidity also create the threat of sap stain on sawn softwood. It is causing concern among exporters, particularly in the unseasoned sector where the product is more vulnerable. UK agents are recommending anti-stain dipping for both unseasoned pine and spruce. The conditions are so unfavourable to timber packaging, that close banded and wrapped KD stock is also at risk from discolouration if it starts to sweat.
In addition to these problems, private forest owners are still looking for higher log prices from the Baltic sawmillers and many of them are suspending logging in favour of general farming for the foreseeable future.
It is not only the smaller mills that are being hit by log supply problems; there are reports that some of the largest Latvian sawmills are working on little more than a couple of days’ log stocks, and many are being forced to make urgent enquiries to Russia.
The rapid rise of the Latvian sawmilling industry has had an impact on the national wood growth increment. One agent commented that extraction was close to capacity and said there was an expectation of new environmental legislation which will restrict harvesting and impose tighter controls on re-planting.
The problems facing Latvian shippers have resulted in insufficient volumes to fill cargo vessels, a factor which in turn has led to some shipments running late, if in fact exporters have managed to ship at all. One importer stated that his shippers advised that only a third of his August volume would be ready for loading and it would be two to three weeks behind schedule.
Shortages
There is evidence that shortages are beginning to bite and several agents have confirmed that prices have been increasing since mid-July. One reported that the level of unseasoned whitewood had risen by an average of around 6% fom for prompt shipment, although redwood carcassing was still dragging behind. The kiln-dried carcassing market is influenced chiefly by Swedish producers and, because of holiday closures, there is little news to determine what the future holds until they return.
The general opinion of the carcassing market is that Baltic producers have reached their lowest price and they are turning away business which is not profitable.
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One agent said that log producers want too much money and the mills cannot pay any more at the current selling levels of sawn timber. It has reached the stage where Baltic shippers are of a mind to let the Swedes take the business rather than sell at a loss.
The price of pulp has been falling consistently, with recent figures standing at US$469 for northern bleached softwood pulp, and the large integrated groups are expected to cut back on felling operations, particularly in Finland. This in turn will reduce the amount of timber allocated to sawmills and the effect should filter down to the smaller producers who also sell to the pulp and paper industry.
UK terminal operators report that carcassing business has been lively and prices have been holding up fairly well. In some cases price increases have been achieved in the region of 3%, but these applied to stock which was previously under-priced and slow moving.
Enquiries for landed stocks have increased over the past month, indicating that there are widening gaps in timber merchants’ inventories. This is true of joinery specifications as well as carcassing.
The redwood market has continued on an even keel, with a slight firming of price where there are shortages in certain sizes, such as wide sideboards and door linings.
Some shortages are appearing in the middle cut sizes as well, such as 50×150, which may be the signal that the glut that has plagued the market for so long has finally come to an end. This might be an optimistic view because, with so many mills closed for the summer holiday, availability on the prompt market is always affected at this time of year. But if the shippers’ magazines are genuinely depleted then there is a chance that redwood prices could strengthen from September.
Redwood shippers are declining forward offers for anything less than selling current levels but, until the Scandinavians are back in full swing, the full picture will not emerge.
Sales patterns are differing between shippers: one Swedish group reported that forward contracts were gaining in strength and there was a noticeable improvement from the merchant importing sector; another large exporter said that their market was still essentially short term and only the large DIY chains and manufacturers were accounting for decent volumes.
Sales of Russian redwood are reported as fairly strong and demand for ex-quay stocks is keeping volumes in check. In line with the comments received from Scandinavian shippers, quay distributors are not over-burdened with the middle-cut sections. Demand for 50mm Russian fourths is said to be very strong from the UK planing mills and there are gaps in many of the sizes.
Demand for decking continues and growth is expected to more than double the figure estimated for last year. One importer said that garden shed manufacturers were experiencing high demand and, in some UK areas, machining times for shiplap profiles were running into several weeks rather than days.
There is some speculation that Canadian exporters are taking another look at both the UK and Continental markets, in view of the impending difficulties regarding retroactive export duties for goods sent to the US.
Canada ships over U$6.5bn worth of timber into the US, which represents about 30% of its market. The US timber industry is seeking protection from the government against, what it believes, is a subsidised material which undermines their market. US sawmillers want to see the imposition of duties to prevent any dumping of lower priced Canadian stock on the American market, and there is a call for duty to be levied retrospectively against shippers who have overstepped their quotas since the last stumpage agreement expired.
Canadian duty
There is talk that all Canadian producers will be expected to pay duty in the future and this will affect the Maritime provinces which at present enjoy exemption.
However, the US department of commerce stated on July 30 that Maritime producers would not be subjected to any back payment but talks are set to take place this month.
Given this situation, Canadian shippers have been monitoring European and UK markets but so far price structures have remained unattractive against the North American market, even taking into account the duty element.
There is no sign yet that the Canadians are preparing to export any significant volumes of solid timber to the UK.
Looking at the softwood market in general, the question remains, has the market price finally reached the bottom? This has been asked many times over the past two years and, each time an opinion has been reached that it has, another surprise has been waiting around the corner.
Eyes on Sweden
There are declarations of substantial reductions in the production of both redwood and whitewood from Finland. In Latvia and the Baltics many sawmills have closed and others are desperately short of sawlogs. The Canadians have cut back on west coast production over the past two years and are active in other markets. Russia has the potential to vastly increase production, but massive investment is needed to unlock supply. The Russian banking system is not geared to provide long-term loans, therefore funding must come from outside sources and there are many who still consider the risk too great.
So, all eyes are on the Swedes: will they make a significant attempt to cut volume and, if they do, will it result in an overall increase in softwood prices?
One agent said that his Swedish shippers had every intention of increasing rather than decreasing production after the holiday and there are several like-minded producers committed to raising capacity following investment in plant and equipment.
The Swedish banks are taking a critical look at profits within the industry, and loans are set to get tighter. They certainly do not wish to bury any more financial corpses than necessary.
