As shippers leave for the summer holiday, they take with them an uncertain picture of the UK market following the referendum vote to leave the EU.
Yet in spite of the fall in Sterling’s value and a rapid hike in the price of imported softwood, traders have witnessed steady demand with stock gaps appearing in many parts of the country.
The post-Brexit softwood market has been affected like all imported goods by a sharp drop in the value of the pound, fuelled by uncertainty over the terms of Britain’s withdrawal from the European Union and further undermined by talk of a quarter percentage cut in the minimum lending rate by the Bank of England’s monetary policy committee.
The view held by many contacts across the importing sector is that too many public figures have unnecessarily talked down the economy, when demand for goods and services has remained steady and British exporters now enjoy a more competitive edge across international markets.
Both Nordic and Baltic shippers have pre-Brexit contracts running in sterling and as such stand to make losses on volumes destined for the UK market.
In some cases buyers have agreed to renegotiate prices in a gesture of good faith to ensure shipments take place, and they have increased their selling prices to compensate.
As one importer commented: “We are showing some understanding to our suppliers because the consequences of current exchange rates could seriously harm their businesses. If the trend was to become reversed and the pound gained in strength, then we would expect the same support that we are extending.”
Beyond this immediate situation, other global markets are busy and mills are gearing up for specifications suited to China, the Middle East & North Africa (MENA) and the US.
A number of Swedish producers are also benefiting from strong domestic demand, selling substantial volumes of decking and pre-finished cladding alongside their structural timber grades. According to their sales offices, they are obtaining strong prices ex-mill compared to those currently achieved from UK buyers.
Price structures in the US for construction grade southern pine have moved up over 20% against the levels recorded at this time last year, creating a better market for surfaced lumber from European exporters. Some Swedish mills are already shipping cargo to the US in reasonable volumes and taking advantage of the production economies in larger mill runs that American importers are able to absorb.
In the UK, noticeable gaps are appearing in some basic specifications caused by late shipments from Baltic mills and a shortage of available transport in Sweden which emerged prior to the summer closure.
With prices scattered over a wide parameter, the most advantageous deals are being achieved by those traders with the best specifications to hand.
As prices have increased, so the value of landed inventories has improved, thereby helping importers to avoid losses on higherpriced stock. The forward market for new production from September onwards has become something of a gamble, and buyers are adopting great caution to avoid too many commitments with exchange rates liable to go in any direction. Many are covering their basic needs but are holding back further purchases in case the other variable factor, demand, begins to falter.
Home-grown producers have started following the market upwards to some extent, but the gap between their production and imported softwood has currently widened. One importer said he had offers of both on his desk with a £40/m3 gap.
Irrespective of price only considerations, there is widespread feedback among merchants that they will continue buying C24 imported production rather than switching back to selling only C16 home-produced. Some merchants are most likely to stock both productions side-by-side in their yards as separate products, giving the end user a choice according to price, quality or what has been specified for the job in hand.
Looking at Sterling’s movement in some detail, it can be seen that at the time of this report (written at the end of July) with £1 worth €1.19 and £1 / SKr11.35 that, compared to the same time in 2015, the pound had fallen 16% against the Euro (€) and 15.6% against the Swedish Kronor, virtually the same figure.
Since June 1 2016, when pre-Brexit exchange rates stood at £1 / €1.289 & £1 / SKr11.954, Sterling’s post-Brexit current value has fallen just below 8% against the Euro and 5% against the Kronor, a sharp concentrated fall following the referendum, but, at least half of the currency losses over a rolling 12 months had already taken place gradually over the longer period.
It is only recently that the fuller extent of currency fluctuations has translated itself into UK market prices, but many contacts have confirmed that there is still adjustment in the pipeline which could put Britain in the same position as other importing countries. As a final unknown regarding currency, it is widely reported that several major European banks are struggling, with 24 failing the European Central Bank (ECB) ‘stress test’ indicating the need for additional funding with the chance of some impact on those countries’ economies.
Also the International Monetary Fund’s (IMF) own watchdog has raised questions of its competency to evaluate banking risks effectively, and this could affect future global confidence in the Eurozone.
It may well be that the UK economy will forge ahead of the other European countries, and with it Sterling’s fortunes could recover. One Latvian contact said that given the option to sell in Euros he has taken the decision to contract both September and October positions in firm Sterling, others said they are still more comfortable with Euros, – both positions being born out of uncertainty. The Latvian share of the UK market increased between January and April by more than 3%, but imports from Russia gained greater pace nearer to 10% with particular demand increasing for 4th and 5th grades as the quality to price value was seen by many buyers to be most attractive.
Redwood joinery markets have reacted similarly to structural timber, with prices rising in accordance with exchange rates. Landed stock prices have lagged behind to some degree, but forward levels are increasing regularly.
There are also shortages in the UK market of certain sizes, with 32/38x125mm decking blanks being highlighted by several contacts, and this situation is unlikely to ease in the immediate future while other markets (including the Nordic regions) are absorbing significant volumes.
Some welcome news for the softwood trade comes from the national housebuilder Taylor Wimpey, which reported little disturbance to its trading patterns since the referendum result. The company confirms that interest in new releases is still strong and potential buyers are still finding access to competitive borrowing rates.
However, the overall message from home builders is one of caution and it is likely that build programmes will be slowed for the immediate future.
Although the construction industry, including civil works, has been reporting continuing slow growth with some projects put on hold, nobody expects this to turn negative and growth levels are predicted to be around 1% for the rest of this year. In the background, the industry still says that there is a shortage of bricklayers and has identified a growing problem of a shortfall in skilled quantity surveyors.
As far as the softwood market is concerned, it appears there is a bumpy road ahead, but the most important factor will be the consistency and strength of demand at end-user level.
When demand falters, there is a tendency in the industry to react by dumping stock and to drop prices.
With potential cuts in supply such as Södra’s publicised plan for an overall reduction of 200,000m3 in production, the value of UK whitewood imports falling by more than 6% in the first four months, and rationalisation amongst south Swedish mills, it might just be that the true value of softwood will at last be realised.
