Summary
¦ The lack of logs from private forests in Sweden and Finland is affecting cohesive supply.
¦ Volumes from the Baltics are low, but the UK is a willing buyer.
¦ China now represents 16% of British Columbia’s total lumber exports.
¦ The availability of redwood in the UK is satisfactory, while whitewood is in shorter supply.
¦ Availability at UK sawmills is falling behind demand.
The continuing increase in softwood prices is creating the impression that sawmills are making increased profits and demand is strengthening. This may be true in some cases, but log supplies and the ever-rising cost of fibre are causing concern, and shippers face the second half of the year with a great deal of uncertainty.
In Sweden, demand from the domestic market has been consistent since the beginning of the year. In particular, whitewood prices have remained firm, setting a benchmark that has encouraged sawmills to take a more bullish stance in the export market. One UK distributor said that supply is not an issue, provided the price is high enough. He said specifications currently being shipped are comprehensive and UK demand is adequate to keep stocks turning over.
A Swedish shipper commented that sawn softwood prices could peak in the third quarter. But if log prices continue to rise, mills will probably cut production rather than churn out higher volumes at reduced margins.
Log supplies are available at a price, but now that most of the storm-damaged material has worked through the system, mills are depending more heavily on harvesting new supply.
Private ownership
One issue affecting the cohesive supply to the Swedish sawmilling industry is the number of forest stands in private ownership. Many owners are family investors, and they don’t rely on income from harvesting. Unless log prices are extremely attractive, they simply sit on their assets with an eye to the future value.
A similar situation exists in Finland, where forest owners hold smaller stands. In recent times, tax relief on log sales has been halved, and will be fully withdrawn by the end of the year, making the incentive to sell fibre to the industry less attractive. Sawmills had sufficient log stocks to last until the start of the summer holiday, but there is uncertainty about what will happen when they return. Some mills may close for extended periods, and some are considering downtime for up to 12 weeks.
Finnish production increased during the first quarter, but these curtailments could quickly reverse this trend, creating shortages in the second half of the year.
In Germany and Austria, problems with log supplies have caused delays in shipments of between two to three weeks from some exporters. One agent said it was almost certain that prices would continue to increase during the third quarter. Both countries have been importing higher volumes of logs this year, despite having large resources in their own right.
The closure of a number of terminal wholesalers during the past two years means the UK now has fewer Russian softwood distributors. Production from the northern region of Archangel has reduced considerably due to the economic situation, but for those mills still running, forward sales have been satisfactory. Volumes to North Africa and the Middle East have remained fairly strong, although as the holiday season approaches, combined with Ramadan (August 11-September 9), trade to those areas will fall back and European buyers may see more offers from Russian mills.
Volumes from the Baltic states are still a trickle by comparison, but for those sawmills with stock to sell, the UK has proved a willing buyer. One shipper reported being outsold until September as soon as forward volumes were offered. Latvian producers have been successful at providing specifications in line with buyers’ needs, but even with the current price structure, rising log costs have made it difficult for mills to show a profit. UK buyers continue to report that some mills are reneging on the shipment of forward contracts where price levels are higher than when they were first agreed.
Canadian imports
Although volumes from Canada to the UK have reduced considerably from 2007 and 2008, Canadian producers have still maintained links with the UK in the CLS market, together with western red cedar. One agent said that west coast shippers in BC are experiencing substantial increases in demand from China, and several companies are actively recruiting more sales staff to cope.
This success follows an initiative by British Columbia’s government investing heavily in promoting its lumber to buyers in China. Government sources have stated that China now represents 16% of the province’s total lumber exports. In the first quarter of this year, 1.13 million m³ of lumber was exported to China, a 97% increase over the same period in 2009. Total exports in 2009 were 3.78 million m³, while exports for the whole of 2010 are expected to exceed 7.1 million m³. In late June, the province announced a further C$9.2m in funding to continue forest products promotions in China, Japan and Korea.
While trade with China has been increasing, news on the US housing market has pointed to a different picture for those Canadian producers who rely on sales to North America.
In June, Canadian shippers enjoyed a surge in shipments to the US because export duties, based on previously higher prices, were rescinded under the terms of the US/Canada Softwood Lumber Agreement. But the duties return this month in line with falling prices, and future construction demand looks set to decline in the second half of the year.
The US Commerce Department’s monthly housing starts report, released earlier this month, showed housing starts in May at an annual rate of 593,000 – the lowest for a year. In the same month, building permits for
new developments fell by 5.9% to 574,000, indicating a fall in future housing activity.
UK supply/demand balance
In the UK, the balance between supply and demand has remained fairly even. Production cuts at mills in northern Europe have kept stocks tight, and the practice of keeping stocks low has been adopted along the supply chain and into merchants’ yards.
The availability of redwood is reported to be satisfactory in terms of UK landed volume, although there are certain sizes that are hard to find. One agent said some late arrivals of Nordic redwood were still hitting the quayside and would add enough volume to support anticipated sales volumes until September.
Whitewood is generally in shorter supply, particularly in higher quality, but increased production of home-grown softwood has eased the pressure in the carcassing market for UK merchants. Prices of British softwood have continued to shadow those of imported material by just under £20/m³ for kiln-dried and graded material.
British log prices are steadily increasing in line with other growing areas in northern Europe, but availability at UK sawmills is falling behind demand due to felling capacity. Internal transport is also failing to meet demand, making it unlikely that prices of home-grown softwood will weaken in the foreseeable future.
Fierce competition
In end-user markets, competition among merchants and importers is fierce – and some companies have not passed on the full extent of replacement costs. A number of contacts said that the appreciation of stock values and increasing prices had reflected well in their current trading analysis, but the actual volume in cubic metres was below budget.
As one merchant described the situation, “we are seeing the price of timber reach a more realistic level and this is improving sales figures. If demand picks up we will make up for some of the difficult times”.
Another commented that although he accepted there were shortages in the pipeline, it was still possible to acquire most items from landed stock at lower prices than those offered on the forward market.
Most merchants and importers report that sales are better than expected given the uncertainties of possible bank interest rate rises and the government’s tough fiscal policy to rectify the UK’s deficit. They are cautious over inventory levels, because they still harbour suspicions that prices could peak and feel that demand is not strong enough to sustain top price levels indefinitely.
