In what has turned out to be an extended winter period, UK importers and merchants have become concerned at just how far trading has fallen bellow expectations. Due to the lacklustre demand, landed stocks of carcassing that arrived in December and January still remain sufficient to support the current market. Whereas normally at this time of year, there would be evidence of shortages in the most popular items, most items are still readily available. Although business has been slow, prices have remained steady, and there has not been any real evidence of panic selling. Holding large stocks does take a great deal of financing, but importers and terminal operators are adopting a more responsible approach to the market, taking the view that there is little sense in selling at a loss when replacement costs are rising.
While the UK market is slowly bumping along, the mills are fighting a battle against escalating production costs and a shortage of sawlogs which is pushing up costs even further. These difficulties have engendered an almost universal resolve amongst shippers to raise selling prices and, as a result, dry-graded whitewood carcassing is likely to increase to the UK by at least another €4/m3 during the second quarter. In the meantime, shippers have already agreed substantial contracts into other major markets such as mainland Europe and North Africa where activity has improved and prices have been rising. For those UK agents who are holding forward enquiries, they are finding it extremely difficult to get offers from north European producers as each enquiry is being assessed on its own merits, and shippers are pricing according to specification. This is particularly true in Russia, where unseasoned prices have been rising, and most of the current capacity has already been taken up in the global market.
While whitewood and carcassing prices are remaining firm, activities in the redwood joinery market have resulted in far more dramatic changes.
For several years, overcapacity, particularly in the Nordic region, has kept prices at an almost artificially low level. Breaking time-honoured values, some specifications of top bracked fifths were being offered below the price of structural carcassing, and in 2004, middle cut sizes in unsorted redwood had accumulated to the point that they became almost unsaleable.
Production backlog
But as a result of the labour dispute in Finland during May 2005 that led to a lockout of pulp and paper workers, there was a two-month temporary shutdown in the Finnish sawmilling industry. This created a massive production backlog, which in turn forced buyers to seek alternative supplies from Sweden and Russia.
Although the Finnish mills caught up on lost production by October, most shippers’ inventories across Europe and Scandinavia had been sold out, leaving an element of demand left unsatisfied. During this period, some of the big forest products groups had already decided to reduce capacity due to the poor returns from redwood sales, and were also considering a programme of rationalisation in both sawmill and paper divisions.
This background of factors, combined with increased demand from emerging markets, have resulted in redwood shortages and, as a consequence, prices have risen sharply, regaining years of lost ground.
In spite of some resistance from the UK merchanting sector, which inevitably seems to struggle to pass on costs, increases of around 10% have been implemented across all Nordic grades from sixths through to unsorted, with a similar picture reflected in the corresponding Russian grades of fifths, fourths, sawfalling and unsorted. Even at these increased levels, prices are still around £10/m3 lower than at the peak periods reached during the past 10 years. If producers retain controls on production, there is no reason to believe that prices will not reach such levels as time goes on.
As many UK buyers have yet to cover their requirements, the full impact of redwood shortages have yet to be fully appreciated. While those importers who have had the foresight to place contracts on a forward basis are able to get a substantial portion of the volumes they require, those being ultra cautious and waiting for the market to take off are likely to find themselves hunting around for supplies with little success.
In line with predictions made at the end of last year, most exporters have already sold the bulk of their decking sizes. One large Russian importer said that all of the 32mm and 38mm specifications were selling as soon as they arrived, not only for decking, but for door linings and re-cutting to shiplap and skirting too.
In the value-added sector, planed and processed softwood is in reasonable demand but prices have as yet to reflect the full impact of raw material costs. There is still an overcapacity within the UK to produce machined goods, a factor which is holding prices back. The recent announcement by UPM that is closing its UK planing operation in Dinnington may have some influence on this section of the market, as it will remove 35,000m3 from UK production.
For British and European buyers, the emerging demand from new markets, such as China, will continue to draw away further volumes of both redwood and whitewood, leaving a tighter margin between supply and demand. Although shortages will make things a lot more difficult for UK-based selling organisations, all sales contacts spoken to felt pleased that the product was now set to gain its true worth and felt the whole industry would be better for it in the long run. This is the first time for many years that the trade has put on a united front – from here on it is up to the producers to keep production under control.
But as the last few years have demonstrated, it is nature that holds the deciding card as to the fate of the industry. The storms which hit the forests of Sweden, central Europe and the Baltics forced the industry to re-plan its future forest policies. The devastation now being caused by the mountain pine beetle in Canada is reported as the worst natural disaster to have hit the Canadian forests. The BC government is issuing licences to increase the cut in those areas worst affected by the beetle. The chief species to be felled being lodgepole pine.
The volume of logs in question is so great that several companies in Canada and North America are making large investments in machining lines to produce stress rated lumber and OSB for the US market. Some volumes will be used as biofuels to generate electricity. It is estimated that over 21 million acres will need to be harvested to contain the infestation which is predicted to peak this year.
