Perhaps the only certainty facing the softwood sector at present is the prospect of uncertainty.
Volatile exchange rates are one of the main causes and for Finnish mills the issue is exacerbated by its nearest competitor, Sweden, benefiting from the krona devaluing against the euro.
The exchange rate movement – what one contact described as “the wretched currency” – became more severe in late February with the announcement of the date for the UK’s referendum on the EU – and the pound subsequently suffering its worst week since 2010 – and now there is uncertainty about a Brexit’s repercussions for the euro.
While this exchange rate volatility does create problems, Finland’s forest products exports are approaching the record levels of 2000, despite production last year being about 3% lower than in 2014. This is reflected in the announcement in late February that the forest products are now Finland’s biggest export sector.
Those export markets have perhaps become even more important over the past year or so as Finland’s economy has slumped, earning it the unenviable title of “the sick man of Europe”.
“Finland is an export-based economy so any decline in international trade affects Finnish companies. The trade embargo on Russia has perhaps had the biggest impact because Russia has been a very big trading partner,” a contact told TTJ.
For many companies 2015 ended on a downward note, largely because of a weaker redwood market, but China’s demand for whitewood saved the day. Last year Finland’s timber exports to China rose by a staggering 58%.
“We exported 653,000m3 of redwood and whitewood, sawn and planed to China which means it’s our biggest whitewood market at the moment. Without those volumes we would have been in trouble with whitewood as well,” TTJ was told.
Not only is China taking more whitewood, it’s buying higher grade, joinery whitewood.
“Ten years ago they bought the lowest grades then suddenly the grades improved and now they’re buying the same sawfalling as the UK and Germany and in redwood they’re even buying unsorted boards so they’re becoming more of a competitor to traditional markets,” said one contact.
He attributed the increased demand to China easing its one child policy. “It was like all Christmases came at once; all of a sudden demand shot up,” he said.
Although China’s import volumes may be affected by the country’s slowing economy another contact was optimistic that consumption would continue to grow. Last year the government published a green building programme which included the promotion of hybrid buildings.
“The Chinese have only just started to use high quality wood and that’s the path they’re going to walk for quite a lot time. Wood is gaining market share and we can definitely see the impact of the sustainability trend in China as well,” he said.
Recognising this potential, the Finnish Sawmills Association and enterprise organisation Finpro have launched an export programme with the aim of doubling sawn goods exports to China. Experienced sawmiller Jyrki Mantere has been appointed as programme manager, and two people have been recruited in China.
In Japan, the economy is recovering and whitewood imports are said to be getting back to normal, although prices are low. Demand for construction products could pick up further this year as the Japanese try to beat the increase in sales tax, which rises from 8% to 10% in April next year. Traders are hoping there won’t be a repeat of the sudden surge in demand that preceded the tax’s introduction in 2014.
“Everybody thought we might see a little bit more activity than normal but the market actually boomed and then it almost collapsed so I hope we don’t see the same thing again,” said a contact.
It’s a different story for redwood, which once contact described as “problematic”. Algeria and Egypt account for 40% of Finland’s redwood exports and, while demand is still there, the countries’ dependence on oil revenues, directly or indirectly, creates some uncertainty. Last year volumes to Egypt were up on 2014 but some sellers have had problems being paid.
“Some exporters have had big difficulties and it makes them nervous about trading with Egypt,” TTJ was told.
The Egyptian currency had devalued, making the situation “even more dire”, said another contact.
However, it’s not all bad. One contact pointed out that Egypt’s GDP growth is expected to accelerate through this year and next and another said that, while uncertainties remain, the north Africa market is “not dead and buried as some people have been saying”.
Another contact was even more upbeat. While he acknowledged that the ongoing instability in the Middle East was affecting redwood sales, the situation had improved since late last year.
Finnish mills had tried to reduce their redwood production and a three-week halt in harvesting when temperatures fell to -30ºC in January has brought supply more in line with demand.
Closer to home, the European market is still in recovery mode and, for the optimists, it’s improving.
“Eastern Europe, especially Poland and Estonia, are doing well, and central Europe is recovering,” said one contact.
However, another shipper said that while European economies were recovering this was not reflected in wood consumption. “I can’t see too many bright spots in European demand,” he said.
The uncertainties across various markets led one contact to describe Finland’s markets as “a strange situation”, too full of contradictions to predict the future.
“In China the economy looks bad but our business seems to be doing surprisingly well; in north Africa the economy looks bad and our business looks bad, and even though the order books are full we have high stocks,” he said.
“And even though whitewood looks positive the price increases we’ve achieved have been very modest. I can’t see anything positive in the redwood market but the volumes have been moving surprisingly well,” he added. “The only really positive thing is China.”
The weak energy market is also creating headaches for Finnish mills, reducing the markets for their dust and bark co-products, and the price they receive.
“The consumption of forest chips for biofuel has grown because they’re subsidised; dust and bark are not subsidised and yet we’re in the same market. We do sell these co-products to energy companies but the price are ridiculous,” said a sawmiller.
The problem has been exacerbated by warmer winters reducing demand for fuel and so wood energy stocks have grown. In the UK, housebuilding is maintaining demand for structural grades and TR26 and mills are generally expecting demand to remain stable or strengthen in the busier second quarter.
“I don’t think records will be broken but I expect it to be positive,” said one shipper. “The fundamentals are strong: there’s full employment, banks are lending and people want to buy houses.”
For redwood, UK traders are buying little and often and the specifications are said to be challenging. One shipper said he could sell a lot more if the goods were available.
“People are buying only what they want or what they can sell. If you have it – good; if not, you drop out of the tender,” he said. “If you have larger volumes to sell it becomes a more challenging jigsaw puzzle if you don’t have the basic specifications. Now even the bigger buyers are more selective.”
As the market heads in to the busier spring and summer period he wasn’t entirely positive.
“I’m not a pessimist but at the moment it’s very difficult to be an optimist,” he said.
“One day at a time.” Another shipper was more certain that UK demand would remain stable over the next six months. “Construction and decking are looking buoyant and there are forecasts for positive development in infrastructure and public sector products.
“The Construction Products Association is predicting a fairly strong period. The sawmills will be looking to recover currency losses and we’re already starting to see some aggressive price increases, especially in redwood,” TTJ was told.
However, shippers are all too aware that currency movements can easily upset the market balance. “If the pound weakens and mills don’t get the increases when they can sell the same goods elsewhere, it will mean supply could be shifted away from the UK,” said a shipper.
