Summary
• Mills are doing what they can to reduce the amount of centre cut carcassing they produce.
• Mills with highly automated lines designed for construction timber will find it hard until the building sector picks up.
• This year, UK housing starts are expected to fall to their lowest since 1945.
• The full impact of the decline in demand for logs has not been felt by private growers yet.
• Specialist round timber hauliers are facing problems as the trailers cannot be used for much other than logs.

Not much has improved for the UK sawmill sector since the spring – and that is of great concern to everyone in the industry.

Mills moved to short-time working at the end of last year in an effort to reduce production after the fall from the high demand in the first eight months. Despite this, there was still a lot of stock on the ground after the turn of the year – and the early Easter and poor weather meant that the anticipated spring upturn did not materialise.

There are signs of a little activity in some markets, but against that there is a considerable volume of UK and imported wood available. Perhaps the most favourable comment from the sawmill sector at present is “we are just ticking over at the moment”.

The worry, of course, is that as the months pass, the chance of ‘catching’ up in the remaining part of the year becomes less likely. After the subdued start to the year, there is now some talk of 2008 being a bit of a washout – and there are fears that the doldrums might last 18 months.

Construction sector

Construction is the key activity, affecting not only timber products used for building but also for decking, fencing, joinery and furniture. Nevertheless, it appears that the market for construction timber is the worst hit at the moment, and mills are doing what they can to reduce the amount of centre cut carcassing they produce from the log. It might sound easy to switch from one product to another – such as pallet, packaging and fencing material – but highly automated sawlines are set up to maximise output of the higher value construction timber, and mills with these installations will continue to find it hard until demand from the building sector picks up again.

The Royal Institution of Chartered Surveyors (RICS) recently reported that house price falls decreased slightly in May. However, the reading is more a case of a slight decrease in pessimism than a shift to optimism.

According to the RICS Housing Market Survey, the house price balance improved slightly for the first time in 10 months but is still a significantly depressed figure, with 92.9% more chartered surveyors reporting a fall than a rise in house prices, a decrease from 94.7% in April. Demand for housing remains weak, although again slightly less so than in April, but the average number of transactions per surveyor over the last three months is now 17.4 – the lowest figure since 1978.

The only really good piece of news from the survey is that there is little evidence of ‘distress sales’ (repossessions or sales from those attempting to avoid the repossession process) – certainly not at the level seen in the 1990s. With mortgage arrears still low, large numbers of distress sales are not expected unless the worsening economic situation results in falling employment.

Talk of recession

There is, of course, the risk of talking recession into being. The Bank of England still predicts a period of slower activity rather than a sudden collapse, but consumers seem unconvinced and more inclined to hold back and spend only when necessary – a damaged fence panel might be replaced, but plans to re-do the whole garden are more likely to be shelved.

For suppliers of construction timber there is the unwelcome news that the surge in housebuilding in recent years has been reversed, with some developments being mothballed in response to the decline in sales which started in the second half of last year and left builders with a large number of unsold homes, both completed and in progress.

In fact, according to the Construction Products Association (CPA), housing starts in the UK this year are expected to fall to their lowest level since 1945, at around 147,000 – way below the government’s target of 240,000 a year in England alone to meet demand, and 27% lower than in 2007. The private construction sector will be hardest hit, declining 30%, reaching its lowest point since 1992. Social housing construction is proving more resilient but, says the CPA, is unlikely to keep to the government’s target for it to gear up to build 45,000 new properties a year by 2011.

Much will depend on the actions and success of government and bank initiatives to ease money supply and rejuvenate the mortgage market, but what has been done so far appears to have had little impact.

With the UK forest products industry now moving to the traditionally quieter time of the summer, hopes are being pushed back for some improvement after the holiday and, particularly, for a return to normal times with the upturn in spring 2009.

Log supply

There is always a delay before the level of activity in the timber processing sector has an impact on log supply. Log prices have been rising but, with demand having fallen, they are expected to drop back again. It seems the time of long, smooth waves in demand and prices has been replaced with shorter and sharper peaks and troughs, which is not easy for any business to manage.

Last year and the start of this year saw plentiful supply from the private sector, which was encouraging. After the usual hiatus for the shooting season, growers’ minds return to logs around March. It takes a while to put them on the market and organise bids, and only then can prices be assessed. It is likely, therefore, that the full impact of the decline in demand for, particularly construction, logs has not yet been felt by private growers, although the expectation is that they will now start to withdraw from the market until supply falls to the level where prices stabilise and move back up.

There is a discernible mood of doom and gloom among growers, but the reality is probably not that bad. Exports are still moving well, as is the small round fencing market, and paper and pulp demand is reasonably good; there have been mill closures but this seems to have been balanced by customers switching supply from Russia to avoid the tariff.

The reduction in demand for construction material necessarily means that a lesser volume of small roundwood is being produced, so there are no particular problems at the moment with finding markets. In addition to demand from the board manufacturing sector, the biofuel market is slowly getting up to speed, albeit in fits and starts, and helping to mop up any excess.

Fuel costs

On top of all the other problems, the ever-increasing cost of fossil fuels – not just diesel but oil and lubricants as well – is adding to the woes of all sectors.

Higher diesel costs are hitting both forest contractors and hauliers – and the specialist round timber hauliers have taken a double hit as the trailers can’t be used for much other than logs. The sector has been ‘fragile’ for some time, and many are starting to think that this could be the last straw – hence the calls for the government not simply to forget about the tax increase later this year but to look at rebates or discounts to help the UK transport industry compete with Continental competitors.

Usually at this time of year the UK forest products industry would expect to be reporting good demand across all sectors. This time it’s more a matter of battening down the hatches.