In contrast with last year’s mild wet winter, freezing temperatures have gripped the Baltic region and ground conditions have improved, allowing better access to the forests. Felling activities are expected to increase dramatically over the winter months, but it will take between four and six weeks for many shippers to catch up with late-running contracts once the logs arrive at the sawmills.
Log prices are still running high in the Baltics, and they are at levels that do not economically equate to the prices shippers are getting for the converted sawn timber. Small- to medium-sized mills are finding that their margins are being severely squeezed as a result of these high fibre costs, and the problem of delayed cargoes due to shipping problems is adding additional burdens as the shippers are having to finance goods stuck on the quay.
In discussing the log supply situation, one agent commented that the larger forest products groups were using their buying power to vacuum up a high proportion of logs, forcing up the log market prices by paying “over the odds”.
UK imports
In spite of the log problems that have affected production at the sawmills, this year’s softwood exports to the UK from the Baltic states should reach around 2.1 million m3 – 27.5% of total UK softwood imports.
The UK is the most significant European softwood buyer of Latvian and Estonian softwood. Lithuania, however, sells almost 50% of its European production share to Germany which amounts to a volume of just over 200,000m3.
Of the three, Latvia is the most significant in terms of the UK market. The UK consumes close to 1.75 million m3/year, which represents around 75% of Latvian production to the EU. Latvian mills have historically made greater efforts to produce length specifications which are more closely linked to buyers’ needs than other competing exporters.
While Sweden is by far the largest exporter of softwood to the UK, with a volume exceeding 2.5 million m3 per year, Latvia has established itself as a key supplier in second place, and the pattern of regular imports would suggest that this business is set to continue. UK demand for green non-structural timber is still considerable and Latvia remains the largest producer of wet wood for the UK market.
Kiln drying
While there are no figures available separating the content of dry-graded wood from unseasoned-ungraded, most agents confirm that the proportion of kiln-dried material from Latvia and the Baltic states is steadily increasing.
Investment in timber drying plants opened up new markets in Japan and North America for the Latvian shippers. These mills further increased their revenue by producing CLS for the US where they were able to achieve higher returns than those from the UK and mainland Europe. However, with a sharp fall in the US lumber market, and improved prices to the UK, it is likely that Latvian export volumes to the UK market will increase in 2003, but the figure is unlikely to be substantial.
With the Christmas and New Year holidays just around the corner, all markets are beginning to close down but agents are reporting continuing interest from UK buyers who are pressing shippers to accept offers as far ahead as possible. Contracts are being agreed for the period through to the end of March, and in a few cases to the end of April, but no confirmation has been received of anything beyond this period.
Forward contracts are being negotiated at higher rates, with increases of around £2-3/m3 for February and beyond. Both kiln dried and green lumber prices have been steadily increasing since the summer holidays resulting in an average gain of roughly £10/m3 fom. Swedish producers are remaining very bullish on price and this is adding to the confidence of the Latvian shippers who believe the market should continue to strengthen through the first half of 2003.
Short-term market
Some UK agents believe there are some importers who still have volumes to place for January as they remain firmly entrenched in the short-term market which has predominated over the past four years. With a series of contracts running late, and delays in cargo sailings, it follows that if demand picks up in the new year then there will be a greater demand on landed stocks and terminal operators should benefit from some brisk trading. However, the weakening price of softwood in the US could influence the European and Nordic shippers to switch volumes intended for the US market back to the UK, which may undermine pricing stability in the long-term.
And there are other possibilities for change in the softwood supply chain. The punitive US tariffs which hit the Canadian lumber producers earlier this year have awakened their interest in other markets. With prices rising in the UK, the possibility of a re-entry into this market by eastern Canadian mills cannot be overlooked. Exchange rates between the Canadian dollar and sterling continue to influence the equation, and it would only take a marginal improvement in the strength of sterling to effect such a re-entry.
Whatever the outcome of supply and demand in the new year, Latvian exporters look set to remain firm on price for the first half. Although there might not be an overall shortage in supply, there are numerous mills that will still be struggling to meet their commitments for January and February.
In the longer term, investments being made in the Baltics by the large Nordic companies, in search of lower cost operations, will transform the Latvian sawmilling industry and most of the independent operators are likely to get swallowed up.
To summarise the situation in the Baltic states, softwood prices are set to remain firm with further increases due in the new year. The log supply situation is improving, but shippers are not out of the woods yet in terms of catching up on late shipments. The US market price might hold sway on the supply pattern later on in 2003 if the Canadian producers re-enter the European market.
