Wet weather and storms over the last few months tempered the markets for UK timber, resulting in a dampish end to the year 2000. The start of 2001 hasn’t proved much better, and claims that recent floods demonstrate the reality of climate change lead rather tidily to the upcoming application of the Climate Change Levy (CCL).
This tax on energy use by business consumers is the UK government’s solution to meeting its commitment – agreed to at the global warming summit in Kyoto – to cut greenhouse gas emissions by 12.5% by 2010. Although WWF trumpets that ‘the economy and the environment will both be winners’ when the CCL comes into effect on April 1, industry is unsurprisingly less enthusiastic about the ‘Fools’ Day levy’.
Critics say the plan is illconceived, flawed, will reduce the competitiveness of UK industry against overseas competitors (no other country is known to be adopting this approach) and that it won’t achieve the desired result of reducing energy consumption.
Overall the CCL is to be ‘revenue neutral’, with the government reducing employers’ National Insurance contributions by the same total amount it expects the levy to raise. But that’s of cold comfort to those industry sectors that will be losers. To be a winner you need relatively low energy use combined with a high number of employees; to be a loser you need to be energy intensive with relatively few employees.
There is a ‘get out’ clause, in that some highly energy intensive industries can apply for relief. But only those industries that meet the criteria set by the Department of the Environment, Transport and the Regions (DETR) can even negotiate for relief.
In the UK forest products industry, this has led to a ‘crazy’ situation, according to the UK Forest Products Association (UKFPA): while the panel products and paper sectors have successfully won relief, sawmills do not meet the DETR criteria and cannot negotiate.
UKFPA is continuing to petition against this inequity: come April 1, panel products and paper manufacturers will pay a significantly reduced levy, while sawmills will pay the full whack.
Faulty tax
Those against the tax say it probably won’t even achieve the objective of reducing energy consumption. The fact is that energy is expensive, and no sawmill is going to use more of it than it needs. And it’s not likely that sawmills will be among the winners even when the NI reduction is taken into account.
Other industries are similarly affected, and while few would disagree that action needs to be taken to protect the environment, the UKFPA is far from alone in stating that the blunt instrument of the CCL is not the way to do it.
All this adds to the woes of UK sawmills. Demand for softwood for much of 2000 was reasonable, but there was a significant slowdown towards the year-end, as a result of bad weather from October, plus increased competition from imports and the continued underlying problem of the strong pound.
The fall in demand for construction timber was of particular concern, with simultaneous reports of increased construction activity and of timber frame housing gaining a bigger market share – UK mills then were not getting their share. Also, financial constraints on builders merchants was having an impact on their stock levels – with a return to ‘little and often’ purchasing.
Flood damage
Construction came to a halt as a result of flooding, and in some areas demand for new homes on flooded sites fell off as buyers reconsidered their locations.
Haulage costs remain a heavy burden, and little can be done to reduce this. Alternatives are being looked at, but not at the expense of customer service. Coastal shipping and rail are used to transport logs to mills with scope for further development. However, road remains the only viable method for delivering finished goods.
The year-end reduction in demand for sawn timber coincided with a shortage of logs in some parts of the country. Supplies would ease if private growers could be tempted back into the market; many in the UK timber industry believe that a more structured approach is needed to ensure sustained supply.
Growers drop in and out
For many private growers, selling timber is not their main business, so if the price does not suit they can choose to leave the trees growing. The resultant ‘dropping in and out’ of the market is something mills would like to discourage, and initiatives such as growers’ marketing co-operatives, though still in their infancy, are seen as a positive development.
With devolution has come the need for the government to publish separate Forestry Policies for Scotland, England and Wales, rather than one covering Great Britain. These policies have to balance the economic, environmental and social benefits of forestry. There are fears that the policy of England has got the balance wrong, with leisure and recreation overriding commercial interests – some say to the detriment of productive forestry.
The policy for Wales is currently being drafted, but the consultation process is raising concerns as it seems politicians have a dislike of large-scale softwood forestry, favouring hardwood to support local craft industries.
For Scotland, the general consensus is that the policy is the most positive towards the industry, as it recognises the economic value that forestry and the forest products industry provide.
Present trading conditions are putting further pressure on UK softwood mills to reduce costs, and they warn that current log prices are too high and reductions will be sought. Investment is also hampered since there’s no chance of passing higher costs on to customers. Most mills are therefore focusing on maintaining the quality of production and service.
There is little joy in the palletwood sector, where the downward trend continues and prices of imported material plumb new depths. Low prices for Baltic softwood have been here for some time, but now it appears that cheap hardwood blocks from eastern Europe are also arriving.
Some thought that 2000 would see the pallet market bottom out, but it is feared that this year will also be bad, especially given the continued decline of the British manufacturing industry. As a result, many believe there will be further consolidation in the pallet sector during the next 12 months.
Fencing and garden products also suffered when the rain set in. However, considerable demand is expected. Storm damage last autumn was followed by more wet weather, which delayed repair work.
Pressure on decking prices
Decking never quite lived up to expectations. Perhaps these were unreasonably high and also many new players entered the market, some of dubious quality, at a time when customers were becoming more discerning. As a result, there is now strong price pressure.
In the hardwood sector, demand for good quality oak and sycamore remained strong last year but varied for other species, depending on area and local market conditions – although good quality logs always found ready buyers. However, the market for second quality logs continues to fall, with prices declining to the level that the hardwood could be used for pallet timber.
Demand for low grade logs has been poor for several years, discouraging private growers. Recently demand for pulpwood and mining timber has improved.
Overall, the UK hardwood sector continues to contract. While demand for English oak remains strong, a large share of the market is from imports. There is still a retail preference for British grown ‘character’ oak, but even here the market is chipped at by imports from the US and Europe, now available at competitive prices.
And what has previously been a problem for hardwood sawmillers is now affecting furniture manufacturers as well. Importers are now being supplied by large specialist European manufacturers or by countries with cheap raw material prices and low labour costs. For example, solid oak furniture is now being imported at prices well below manufacturing costs in the UK.
Other parts of the hardwood sector are also being hit. Last year saw the closure of two hardwood kilning facilities – and a combination of increased costs (including compliance with HSE legislation) and lower margins means the number of specialist hardwood felling contractors is reducing, especially in the south of England where the shortage is serious. Contractors were further hit by wet weather preventing felling.
Those hardwood sawmillers who have succeeded have focused on niche markets and a high level of customer service. The hope is for exchange rates to fall and costs in eastern Europe to rise.
With continued tough trading conditions for panel products manufacturers, there has been further downward pressure on prices they will pay for sawmill co-products. Also, recycled fibre continues to replace virgin fibre, and some large wood producers have even been importing chips, both softwood and hardwood.
Looking ahead, prospects are varied. Strong growth is expected in construction, fencing and garden products, but it is impossible to see how much demand will be secured by UK mills. Improve-ments in the pallet and packaging sector are needed but not certain. Above all, currency and weather factors remain significant.
