Summary
• Demand is increasing and prices are rising.
• UK selling prices are below those on the forward market.
• Profit margins are under pressure.
• British mills are benefiting from the rising cost of imports.
• Baltic states’ exports are increasing again.
During the second quarter, softwood producers across northern Europe have experienced increased demand from Continental markets, north Africa and the Far East. Prices have been rising sharply and, compared to current levels in the UK, whitewood is selling, in some cases, at the equivalent of €15-20/m³ higher on the Continent. In Far Eastern markets the difference is more than double, and redwood sales to North Africa are priced at around €20/m³ ahead of UK buying levels.
Although selling prices in the UK have been rising, they are lagging behind the rate of increase on the forward market. This is largely attributable to the level of landed stock in the UK which, although not excessive, is still ahead of demand, and importers have been easing levels up gradually.
By applying the average cost of their inventories, importers have cushioned customers from the full extent of the increases, but it is only a matter of time before the full levels must be reflected. Where importers have accumulated slow-moving specifications, price deals have been offered to move excesses in certain lengths, but it is debatable whether this has generated any extra sales from a market that is only buying what it needs, and when it needs it.
UK competition
Competition between UK importer and merchant levels is aggressive, and it is a common complaint throughout the trade that gross margins are being denuded. Demand is variable between different regions but, in general, most traders are saying that volumes of softwood sold to date are higher than the same period last year. Activity in the south-east has been buoyant and selling prices have moved higher than in some areas where the market has become flat, giving rise to a lot more price resistance from end users in the building and construction sector.
With the value of sterling trading weakly against the euro, Swedish krona and dollar, the price of imported softwood is being further underpinned and pushed higher. This trend is helping the British sawmilling industry enjoy a strong demand for home-grown softwood products, and most producers are reported to be sold out for the foreseeable future. As prices of imported goods rise, so there is better opportunity for UK sawmills to improve their trading margins in pounds, provided of course that log costs do not increase too much and absorb the gains.
High log costs
In terms of log supplies across northern Europe, there is a general consensus that supplies are arriving to schedule at the sawmills, but Swedish mills in particular are finding costs are too high. This position is forcing Swedish producers to demand the highest price for whitewood. This has allowed Baltic producers to regain some market share of C16/24 kiln-dried carcassing from the Scandinavians by selling at more competitive levels.
A number of contacts shipping out of Riga in Latvia have commented that vessels are much easier to fill than they were at this time last year, but for some UK ports, space on board is now in short supply. Although softwood exports from the Baltic states are running at almost 40% lower than in 2005, volumes are rebuilding slowly and predictions by analysts of 1.74 million m³ for this year could prove to be on the low side.
A forward comparison between average Latvian and Swedish selling prices for July shows a potential gap of around 7%, but within that figure there is likely to be an increased proportion of redwood carcassing from Latvia which would be valued below whitewood levels due to the general characteristics of the fibre.
In spite of some record log prices in Sweden, shippers are selling well into other markets and getting better returns. Although Swedish exporters will always place some volume into the UK, Britain’s ranking as a top customer is falling behind China, Japan and North Africa – markets that are still emerging and growing.
In terms of the overall supply of carcassing, as on many previous occasions the maxim is that if customers are prepared to pay the price, they will get the wood.
UK wholesalers, aware that sawmills will be closing shortly for the summer holiday, have covered anticipated requirements in advance, so it is unlikely that there will be any great shortages in the market during July and August. All contacts said that prices had to increase on a month-by-month basis from July onwards to reflect the cost of imports.
Joinery market
In the joinery redwood market, shippers have noted improved demand from UK buyers from both landed stock and on a forward basis. One shipper said that 50mm centre-cut material was in short supply, and most of the production for July and August was now sold. Inventories of this specification are in the low hundreds rather than in thousands of cubic metres, and the situation is mirrored in stock notes being circulated for inventories on the quayside in the UK.
In spite of the fact that markets in North America are still weak, there is no rush among Canadian mills to consider cutting UK carcassing specifications. With the exception of some limited volumes of CLS, there are no serious volumes of construction timber coming into the UK from Canada, and mills are not actively looking to the UK or even mainland Europe for new business. Western red cedar sales are consistent and, in spite of recent price increases, competition from alternative products such as modified wood has not significantly affected volumes.
West coast producers still continue to regard China as their most significant area of demand, although many shippers are waiting for the reconstruction projects in Japan to begin after the destruction caused by the earthquake and tsunami in March. Over the last five years, SPF prices reached their lowest point in January 2009 and recovered to a peak in April last year. Current levels are trading at 25% below the April price.
On the eastern seaboard, log costs have risen to a point where the whole industry is struggling to make ends meet, even though selling levels are higher than from west coast mills.
Roller coaster ride
Internal price levels of eastern SPF over the past five years fell to their lowest point in March 2009, and since then they have been on a roller coaster, peaking this January after a 38.5% recovery. Currently, eastern SPF is valued at just around 15% below January levels, and comparing the eastern base price of 50×100 SPF to the west coast equivalent, east coast shippers’ selling levels are 29% higher.
Future indicators point towards rising softwood prices as fuel costs push up global freight rates. Demand from China and Japan will suck in substantial softwood volumes at better prices than countries such as the UK will be prepared to pay, and log prices are set to remain at a premium as demand from the biomass fuel industry increases.
As softwood supplies become more difficult to obtain, the need for the efficient and consistent application of fibre in the market will continue to support an upward trend for engineered wood, and wood composites. The number of applications where LVL, I-joists and laminated sections are replacing solid wood is increasing rapidly.
