Summary
¦ Most mills are reducing production.
¦ In October sawn softwood output was down 1% on October 2009.
¦ Demand in Europe remains flat.
¦ Shippers expect business to improve in the second quarter.
¦ The Swedish krona has strengthened recently.
October signalled the start of another period of production curtailments by Swedish sawmills as sawn softwood output fell 1% lower than in October 2009.
According to the industry association, Skogsindustrierna, from January to October production was up 6.7% on the year, at 14.2 million m³ but now, with “extensive cuts” planned for the Christmas holiday period, it is doubtful that annual production will reach the forecast 17 million m³. Last year production totalled 16 million m³.
Most mills in Scandinavia, and many in central Europe, have announced production cutbacks in response to higher inventories and a seasonal downturn in demand.
“During the year production has increased, plus some of the markets stopped again due to the second wave of financial problems,” said one shipper. “It became clear that this increased production was too high in relation to what the markets could take up with confidence.”
He applauded the industry’s new, responsible attitude to the situation. “Mills’ normal behaviour when they start to get this imbalance is to shut their eyes and tell their customers it’s OK. Now when producers see customers pulling away from the buying table they’re reacting pretty immediately and taking production down.”
Temporary blip
Another shipper said the market had slowed “more than normal,” but he thought the pace was temporary. “I don’t think we’re in a freefall situation; it’s more of a blip in the market,” he said.
It was not helped, he added, by the freezing conditions in the UK. “This is disastrous, it just slows everything. I think it’s going to be a bit like this through to January at least, but I’m optimistic that come February or March we will see it turn around.”
Producers holding landed stocks on UK quaysides were also adding to the market “turbulence” and these “quite big volumes” of unsold material could ultimately affect price stability.
Mills are hoping that reducing production will also lower log prices, which have remained high during the year, although supply has improved. Log prices were still “sky high” throughout Europe, partly driven by a strong pulp and paper industry, said a shipper. He thought prices, which are eating into producers’ profitability, would fall, but not very far. Another said log prices had started to ease “but not by very much”. “The only way to make them go down is to lower production,” he said.
Companies with their own forests have a better ride, but for those relying on supply from private forests owners it’s a constant juggling act.
“The log market is not in tune with the sawn timber market, it never has been and it never will be because the private forest owner is like an individual on the stock market. If he thinks he can get more for his logs tomorrow, then he will wait to sell,” said one contact.
He added that mills in Sweden and Finland have healthy log supplies but, if prices fall as predicted, shortages could emerge in late summer.
Prices of sawn timber have slipped slightly across all grades but, according to one contact, the movement is only really noticeable on volume sales. “Prices have come down if you put volume on the table and you’re ready to negotiate but if you look at day-to-day top-up business I don’t think they’ve come down very much,” he said.
Strengthening krona
The krona’s strengthening against all currencies is another factor affecting shippers’ margins.
“We’re losing 7-8% on the currency compared with the summer,” one shipper told TTJ, but another thought Sweden’s currency had returned to its correct value. “We had an unjustified advantage for a period but the krona is now where it should be. It was too weak and it is back to where it’s been for the majority of the time since we joined the EU,” he said.
Throughout most of the year demand has been below par and now as the seasonal slowdown approaches it has become more selective. “Customers in the UK have balanced stocks, they’re not overstocked and the buyers are holding back to see where the market settles,” one contact said.
Another told TTJ that there were only three markets where demand was normal or better – China, Australia and north Africa/Middle East. “In Europe it’s still pretty flat and even though there will be recovery of a couple of per cent, it’s from a pretty low starting point,” he said.
In Sweden, demand from the RMI market continues to be stable, and an increasingly active housebuilding sector provides more promise. “We’re building more houses than we have done for 10 years,” TTJ was told.
New year trade
Producers are preparing to face a tough winter but they believe that the production cuts they’re implementing now will lay the ground for an upturn in the second quarter.
“I’m convinced that once we get through winter and into February/March the market could turn around. I don’t think we’re in a falling market and we can prove it now by taking measures not to overproduce in our sawmills,” said one shipper.
Another described two scenarios. The first is that production cuts will reduce inventories and the market will pick up in the second quarter. In the second scenario the production cuts will be “talk and not action”, inventories will remain high and that will depress the market through to the summer. “But if I were to bet on anything, the first scenario is more probable,” he said.
Another sawmiller was pessimistic about any significant change in demand, but he agreed that producers were taking the correct approach.
“I’m optimistic in that the industry is taking measures and manufacturers of all sizes are curtailing. They still have 2007 in fresh memory and no-one wants to have unsold stocks. We will have a tough Q4, and a tough Q1 with these raw material prices, but we have a better starting price than in the second half of 2007 when everybody was running straight into a wall.”
