Summary
• Turbulence in pricing structures has lead to hand-to-mouth trading.
• UK demand for softwood is poor and prices are cheap.
• Finnish sawmills have reduced softwood production by more than 20%.
• The decline in the housing market has cause severe difficulties in the CLS, TR26 and I-beam markets.
• Cladding forms a growing part of many timber merchants’ product range.
As uncertainties continue to sweep through the global economy, the softwood industry faces a challenging time. Falling demand and over-production have combined to undermine selling prices during the year, and faced with fierce competition and the need to reduce inventory levels, importers have been forced to write down stock values in order to keep their share of turnover.
The turbulence in pricing structures has also created a lack of confidence in the forward market, because, by the time goods have been produced and shipped, their value on the UK market has already decreased. This situation has induced UK merchants and importers to shop around for deals on landed stock rather than entering into forward agreements with shippers, which they currently see as an unnecessary gamble. This hand-to-mouth trading will ultimately benefit the quayside terminal operators, and help to reduce over-stocking levels which have been costly to finance.
While this balancing act takes place, softwood agents are likely to suffer from a general downturn in new contracts until the end of the year. Agents also have concerns that when shippers begin to cut back on production, it will become increasingly difficult for them to offer full specifications against buyers’ enquiries for the first quarter of 2009, if and when importers come back to market.
As forward orders have dwindled, so full cargoes have become difficult to assemble and, as a result, shipping lines have switched their services to other commodities and destinations. This has reduced vessel frequency along certain passages, and will create longer lead-in periods in the future, causing even more problems for forward sales.
Shippers’ perspective
From the softwood shippers’ perspective, the UK market has turned sour, demand is poor and prices are possibly the cheapest in Europe, and there is also a mounting uncertainty as to how long the situation will continue.
In contrast, the mills are finding better opportunities in other markets such as Japan, North Africa and parts of Continental Europe, which are proving more resilient to the so-called ‘credit crunch’ than the UK. Some North European exporters are even looking towards the US market again due to the rising dollar, and confirm that American buyers are beginning to show revived interest in their production.
In order to improve future prospects for the redwood market, a number of large Nordic producers have made the decision to cut production in a bid to avoid losses and hopefully rebuild profit margins. Whether this will prove to be too little too late to influence trading in 2009 remains to be seen, but there is a growing determination in the sawmilling industry to do everything possible to achieve improvement.
Reduced Finnish output
Finnish sawmills have been reducing their softwood production during this year, and at the end of August a downturn of more than 20% was reported against the same January-August period last year. The heaviest cut in production was made in whitewood, but redwood was still held under control.
In Sweden, production was reduced during the extended holiday period in July and August, bringing volumes to date down by approximately 5% across the board.
While the overall volume of Nordic softwood exports to the UK decreased during the first six months of this year, Swedish whitewood shipments to Britain rose by more than 5%, adding extra volume to the already high level of carcassing stocks.
It is evident from the Nordic trend that the production and shipment of redwood is reducing, and if the sawmills stick to their plans, there will be an improved balance between supply and demand. Some shippers predict there will be noticeable shortages of redwood in 2009, probably from the second quarter onwards.
One large Swedish forest products group said that since the summer holiday, their production had been capped by more than 200,000m³, and the mills were scheduled to make further reductions through 2009 amounting to 500,000m³. They further commented that their stock magazines were becoming depleted and redwood specifications were falling quickly. Given their growing success in other markets, they expected prices of joinery grades to gradually recover in 2009.
In the UK, the whitewood market still remains depressed due to the fall-out from a sudden drop in demand combined with over-buying. Carcassing prices have hit rock bottom and competition for what little business exists is fierce. Some traders are of the opinion that UK prices could start to climb once landed volumes begin to thin out, but when this will occur depends entirely on the rate of demand.
German mills firm up
One of the main protagonists to add to the misery of falling prices earlier in the year was Germany, turning high volumes of whitewood (normally shipped to the US), onto the UK market. But the German mills have recently started to firm up their selling levels, and have surprised UK buyers by turning down cheap offers.
Similarly, Baltic producers have pulled out of the loss-making arena and are beginning to increase their prices by seeking opportunities in other markets, and expanding their involvement in value-added products.
Canadian shippers re-entering the UK market have found it more difficult than they were used to some 15 years ago. Because the mills are such large producers, they lack the flexibility to switch production on and off quickly enough to produce volumes on demand for British buyers. UK specifications have become smaller and more specific, and buying patterns less predictable than in the past. Without long-term commitments, it is unlikely that the Canadians will offer much in the way of repeat volumes seen in late 2006 and early 2007 in the foreseeable future.
Among exporters, all eyes are now on the big Swedish carcassing producers – and the hope is that they will adopt tighter control over whitewood production. As one shipper commented, ‘the ball is firmly in the Swedes’ court, the other producers are making an effort to keep a grip on production’. Another said that ‘whitewood needs to recover, and the Swedes are the ones that can make or break the market.’
It is interesting to note that during the first half of 2008, Sweden’s global exports of whitewood grew by more than 20%, but the price fell by over 30% from the same period in 2007.
UK housebuilding demand
Turning back to the UK domestic market, the largest problem facing UK importers and merchants is the dramatic downturn in demand from the UK housebuilding sector. The subsequent sharp drop in new housing developments has caused severe difficulties in the CLS, TR26 and I-beam markets. These products are the main components used in modern building techniques, and are closely tied in with timber frame construction, which counts for a very high proportion of new house types.
Companies relying on these products have been hit harder than the general merchants, who sell a wider range of softwoods to a broader customer base, such as home improvements, agriculture, joinery and bed manufacture. House refurbishments, dormer conversions and single storey extensions tend to utilise solid wood timber specifications, rather than engineered products, and these tend to favour the smaller local timber depots.
Although the cladding market has recently plateaued, there is still strong demand for modified softwood, larch and cedar. These products now form a growing part of many timber merchants’ product ranges, providing more profitable returns than standard building timber.
The softwood trade has already been weakened over several months by deteriorating economic conditions. If demand does not improve in the last quarter, the cumulative effect will be a spate of cutbacks and casualties.
