The Swedish sawmill sector keeps on outperforming expectations. Despite a decline in the European and global sawnwood markets, demand for Swedish wood has remained high all the way through to summer 2023. Shipments for July were a bit lower than expected, but as the Swedish industry is typically shut down for holiday, it is difficult to make any future assumptions based on that.
Swedish sawmill production during 2023 has remained fairly strong, although slightly lower than what has been observed in the last few years. Inventory levels are at a normal level, but during the year have decreased for five out of seven months. As such, shipments have been quite strong for most of the year, and deliveries year-to-date January-July would have qualified for a new record, if it wasn’t for the even stronger years of trade during the pandemic boom.
Although demand for Swedish wood has been good, costs have also significantly increased and roundwood inventories are significantly lower than usual. While during the pandemic prices were typically set on a high competition market and demand driven, since late 2022 the situation has somewhat changed, and the almost flatlining of prices can be interpreted as a symptom that they are now typically more cost driven, and that higher costs have created a higher than usual price floor.
Prices for Swedish exports have remained practically flat throughout 2023, at least after compensating for currency exchange fluctuations. They are, however, still a fair bit higher than before the pandemic, which, as mentioned, could be attributed to the higher cost situation effectively creating a base for the sawn wood prices.
It is also fair to assume that it is not only the exceptional quality and service from Swedish sawmills that has led to the high activity levels at Swedish sawmills during 2023. Rather, the effect of the significantly weakening Swedish krona has likely focused a higher than usual share of European demand on Swedish suppliers. So even if demand has been in decline in Europe, a larger share of sales has been met by Swedish timber.
The Swedish domestic market is currently quite weak, and construction is projected to be halved in 2023 compared to a long lasting trend over the last few years. The lower construction activity is also expected to last into 2024, at least.
The Swedish market, of course, faces the same challenges as many others, with a weakened economy and a challenge in finding a business model where construction activity can continue while the cost of capital has increased by several 100%. Higher interest rates will put a strong pressure on the building sector to innovate or revise their cost structure. This is even more the case since current economic forecasts predict rates, at least for a while, to remain at elevated levels even after reaching inflation targets within a few years. This is something which is likely to be faced in all the important sawn wood markets going forward.
UK STILL THE LEAD CUSTOMER
The UK has remained as the most important export market for Swedish sawmills, just as Sweden is the biggest supplier to the UK. It’s a long-lasting and strong relationship of mutual dependence. This was clearly illustrated during spring to autumn of 2020 when market expectations went from UK customers expecting demand to collapse, to everyone realising that we were about to see the opposite and super strong demand. In my eyes it was very impressive to see the pace that the whole supply chain managed to shift, going from planning for decreased (or even zero) volumes, to supplying record amounts. Granted that there were significant strains and some inconvenience in terms of availability at the end of the supply chain, the sheer volume of sawnwood that was exported to the UK in a short time frame was still unparalleled.
Over the last few years we have seen an increase in Swedish exports to the US. It’s something which we are expecting to be the beginning of a new trend that will only continue to grow, as the Americans are seeing increased building demand and decreased supply from Canada. They are expected to turn their eyes even more towards Europe to import a larger share of their supply. That trend will undoubtedly put a higher competitive pressure on the UK, although its long-standing good relationship with European suppliers is likely to give it a competitive edge.
Going forward the market situation is even more uncertain than during the pandemic. Demand for Swedish wood has remained strong, but how long can it last? And what will be the effects if the krona continues to depreciate?
In the near term we are looking to the west as our crystal ball, following UK demand and construction. But, even more so, developments in the US market are expected to provide the first indicator of any positive turn on the global sawnwood market. America is experiencing high building demand, and has been able to get a step ahead in the fight against inflation. The turbulence Europe is experiencing in the energy markets is also less of a problem for the US.
Looking at a five to 10-year time frame, the forecasts are for continued increasing global demand for sawnwood, while supply is expected to remain stable, or in many regions to decrease. Our expectations are that within this period and into the further future, we will see a shift of Swedish exports from other overseas market to be more focused on the EU, UK and US markets.
From a European perspective, new EU legislation is one of the main factors that might lead to a reduced supply. Many regulations have not yet been implemented, but have recently been finalised or are in their final stages. While many of the final wordings have been more favourable than the initial drafts, the big issue remains that of the uncertainty in how the legislation will be practically implemented and interpreted and the effect it might have on available supply of sustainable building materials in the future within Europe.
So far we remain hopeful and optimistic about Sweden’s ability to continue to be a primary supplier of sustainable building materials to the world.
