As industrial, commercial and financial institutions ratchet up a response to the unfolding situation in Ukraine, so the forest products industry is following. Russian and Belarussian wood products have fallen under legal sanctions, and already leading importers are refusing any new contracts where wood is sourced either directly or indirectly from the two countries.
In addition to an embargo of wood products, Russian-owned shipping is not being accepted for discharge at UK ports and where vessels have arrived, stevedores have refused to unload cargoes. This has also included oil. The measures have caused some vessels to divert and they have been forced to look for another country willing to discharge and reload on another ship.
As the effect of the sanctions begins to fully bite, the forward softwood market will be affected by shortages of raw materials previously supplied from Russia and Belarus. This will not only relate to direct purchases, but other buyers processing their fibre will also be affected. The main area involved will be the cross-border importers in the Baltic states.
As an illustration, Latvia is the UK’s second largest supplier and it currently produces around 3 million m3 of processed softwood. But it also imports around 1.3 million m3 making a combined capacity of 4.3 million m3 per year.
Latvia has an export potential of 3 million m3 and channels around 1.6 million m3 (53%) to British buyers. The balance is exported to other markets.
The remaining volume goes into its domestic market consumption, which is averaging approximately 1.3 million m3 (confirmed 1.383 million m3 in 2020).
The cross-border imports of 1.3 million m3 in sawn/processed softwood have been chiefly reliant on Belarus, with a secondary volume from various regions in Russia, such as Karelia.
The embargo on Russian and Belarussian imports will have the effect of withdrawing over 1 million m3 of the Baltic supply chain. The purely processing mills that kiln, plane and grade the fibre will be most affected. Mills with saw-lines converting from actual logs will have access to Baltic harvested fibre or other European log supply and will be able to continue producing softwood products.
In addition to the ban on physical products and logistics services, accreditation certification has also been withdrawn by PEFC and FSC, making goods from the sanctioned countries unacceptable under the scheme and, in essence, they will be regarded as contraband.
For construction graded softwood, there are few alternatives for importers to turn to because the German and Nordic producers are already well-sold. At some point Canadian productions may become available once again, but currently they are tied into the US markets as prices remain higher there than in Europe.
The current UK market is still recovering from the vast overstocking of last year, with a substantial volume at the quayside both home and abroad. Much of the UK landed stock is awaiting distribution or remains unsold, and some sellers are still selling below replacement costs.
To appreciate the scope of softwood shipped last year, the UK imported just short of 7.6 million m3 in 2021, way over the more normal figure of 6.6 million m3 in 2020. That difference is almost an additional 1 million m3. The obvious question to ask is, what was the actual consumption last year, and how far over did supply exceed demand?
Most importers believe that supply was heavily in excess of demand, and that the stock levels will take until April to reduce to normal levels before the market properly re-sets.
With the new import restrictions in place, there is every reason to expect a growing number of shortages in softwood specifications. These shortages will combine with reduced shipping capacity and a sharp increase in freight costs to push prices upwards.
Shipping costs are now volatile and increases will be sudden and higher than the trade has previously experienced.
