Strong demand in global commodity markets has generated a price upswing in everything from fuel, power, industrial and precious metals through to agriculture. The forest products industry has been no exception, and with demand exceeding supply, prices of solid wood and wood-based manufactured products such as OSB and plywood have been rising steadily since April 2020.
Since the beginning of December 2020, softwood production has been hampered by extreme winter conditions in northern and eastern Europe while the spread of Covid-19 in the workplace has brought some mills to a standstill. As a result of these factors, supply is running late, and output is below normal capacity. This combination of events will only lead to shortages.
The new year started with positive growth in the value of many commodities. In the energy sector even crude oil, which hit an extreme low, has bounced back by more than 25% while natural gas ascended by some 80%. Copper prices strengthened by almost 50%, and iron ore and precious metals are all showing increased growth.
In the forest products sector, global prices have accelerated and levels in the US have seen spikes where they have doubled. The US is predicted to import around 25 million m3 this year to help feed consumption of more than 81 million m3. Most of this import volume is normally derived from Canada, but shortages of fibre and a shrinking production on the west coast have left the door open for European mills to make further gains into the US, and in particular Swedish producers. Softwood trading has been consistently buoyant since April of last year and has almost seamlessly continued through to the current market. There is a general consensus among traders that the trend will continue well into the foreseeable future, and both shippers and UK importers agree that imported softwood supply is very unlikely to meet demand.
It also now seems inevitable that gaps in specifications will be a common problem during the first half of the year and beyond. In spite of their most concerted efforts to meet the needs of UK buyers, Latvian sawmills have been hard-pressed to produce structural timber because sawlogs have been slow to arrive. Also, cross-border supplies from Belarus and Russia of supplementary rough sawn material for further processing have virtually dried up, and prices are continuously rising. In addition, current reports from Belarus indicate that exports of manufactured products such as MDF and plywood have slowed to a trickle. A number of producers in Latvia have experienced short-delivered log contracts and this is pushing the mills into bidding for fibre on a regular basis to get the supply they need. A lot of mills have found themselves inadvertently squeezed between trying to honour their customers’ orders and being forced into revising their log purchase prices. Ultimately many shippers have been compelled to ask UK buyers to pay more for goods already contracted, or face losses. The situation seems to have reached a stage where agreements are being replaced by continuous re-negotiation.
The weather in northern Europe has been a major factor governing log extraction, with rain-soaked forest access roads preventing machinery from accessing many logging areas during the second half of 2020. This was followed by severe winter conditions at the start of this year with deep snow and ultralow temperatures. Areas critically affected in early 2021 were north central Finland, Russia, Belarus and the Baltic states.
In Latvia, temperatures plummeted to -30° Celsius in January freezing up hydraulics, treatment plants and making machinery such as log feeds unsafe to operate. In some zones there were also power cuts, disrupting kilning operations and heating systems. With temperatures forecast to rise again in early March, there are concerns that a fast thaw could cause widescale floods in the forests.
The Covid-19 pandemic has reached many secluded rural areas all over the Baltic region, and even isolated villages and towns to the east in the Ukraine. Large numbers of the forestry and sawmilling workforce became infected and were forced to isolate, causing both a temporary cessation of log extraction and closure of several mills.
In spite of the many difficulties relating to the supplies of raw material, Latvian softwood exports to the UK last year increased to almost a 20% share of the market. The actual products within that figure are not accurately disseminated, but visual assessments made at UK ports showed high volumes of rounded posts, landscaping products and pallet wood as opposed to strength-graded material. While raw material shortages have been affecting Latvian production, the US market continues to draw increasing volumes from north European producers. This market has consistently been paying higher prices for structural softwood over and above the UK and Europe.
The larger forest products groups in Sweden have been active for several years in the US, and with firm demand and premium prices, it is extremely unlikely that any volumes allocated to the US market would be re-allocated back into Europe.
Scandinavian and continental markets are busy. Sweden’s own domestic consumption is averaging more than 5 million m3 per year and importers in Denmark, Norway and the Netherlands are all pushing for more volume and are ready to pay the necessary price to secure supply.
With such strong widespread demand, there is little chance of any surplus arising for UK buyers. Most importantly, given the foregoing background of supply and demand, there is little evidence that any sudden drop in price could occur as witnessed in 2019 when the market crashed at a rapid pace.
Turning to the quality grades for joinery, planing and industrial use, the sawmill allocations to the UK are selling consistently and certain specifications like redwood sawfalling and straight fifth grade for decking material is still struggling to keep up with demand. Prices of the high-quality productions of unsorted and fifth are trading below those of C24 construction timber purely down to the high demand for the latter.
The fallout from Brexit appears to have been very limited, and contacts around the UK confirmed that normal break-bulk softwood cargoes had been cleared efficiently. One importer commented that issues had appeared with trailer traffic into Northern Ireland carrying speciality sheet materials but these problems were successfully overcome. The extreme weather conditions in the Baltic Sea and Gulf of Bothnia needed the services of icebreakers to get some vessels under way. Many of the regular liner vessels are already built to ice class specifications and can move more freely, but conditions have been such that voyages have been extended an extra day or two between loading and discharge.
The performance of timber treatment has been a matter of concern to the members of the Timber Trade Federation and Wood Protection Association, and this has manifested itself in an initiative to drive up basic standards of wood preservation. From the end of March, members will be required to supply product suitable for its intended use.
Members will be required to state the Use Class on documentation and to provide guidance on what the classes mean. From Use Class 1 to 5, there are end uses that need the treatment efficacy to deliver the appropriate protection. For example, UC2 would provide protection against insect and fungal attack in internal situations such as roofing beams, but for actual ground contact, UC4 must be supplied.
It goes without saying that species, moisture content and treatment process control will all play a part in trying to achieve this goal. The most suitable of commonly available European species suited to UC4 is redwood pine (pinus sylvestris) , but it is widely agreed that due to its cell structure kiln-dried whitewood spruce (picea abies) will struggle to achieve a certifiably level higher than UC2.
At this stage it would appear that for UC3/4 structural sizes such as 45x145mm redwood must be selected, while whitewood in such a dimension would be limited to UC2 (internal or element-protected).
MARKET SUMMARY
Looking at the strength in demand across the global softwood market, supply appears to be much tighter than the trade initially anticipated. Prices have risen accordingly, and in the UK, kiln dried C24 levels have increased between 64% and 67% since Q1 2020 to a current level which is a record high when translated into sterling.
This surge in the market comes after many painful decades, when softwood virtually stood still compared to many other commodities. The substantial investments in machinery, logistics and forestry that so many companies have made throughout the industry may now finally prove their worth.
