As trading began in January, Sterling prices of softwood remained solidly frozen at their lowest recent levels, which became established during the last quarter of 2015. At the same time, the pound began a downward slide against the major currencies, notably the US dollar, Euro and Swedish Kronor. This downward movement gathered momentum through February to such a point that north European shippers began switching more volume to markets in Holland, Denmark, and even Poland where monetary returns became higher than in the UK.
With so many softwood producers needing to stem losses in the UK market, economic forces dictated that action was needed to rectify the situation from March onwards. Against increases in the forward market, unsold landed and consignment stocks continued to be released into the market below replacement levels, and these volumes were, and are currently seen by most to be holding the market back. Contacts among importers and merchants have stated their impatience with shippers and agents who are still giving wood away. This feeling is mainly driven by the need for a rise in inventory values to compensate for writedowns during 2015, when prices weakened.
While the current and well-publicised Brexit issue has cast a shadow of uncertainty over Sterling, announcements by the Bank of England of intended interest rises which never came to fruition also had the effect of undermining the strength of the pound.
Analysing exchange rates over a twelvemonth period from last March to the end of February, it can be seen that Sterling peaked against the Euro in mid-November at €1.43/£1 then fell to €1.27 – an 11.19% drop. Against the mean average for the 12 months of €1.37, the decline was 10%, representing a significant weakening of GBP.
A similar set of figures is revealed when comparing Sterling to the Swedish Kronor (SKr). The pound rose to its highest point last August at SKr13.54/£1, then dipped and recovered momentarily by October before diving to SKr11.89 (-12.2%), 7.4% below the average of SKr12.4 over the same period of 12 months.
As this report was being written during the first days of March, Sterling had bottomed out and made a small recovery, but this was not enough to stave off the pressure for price increases from the northern European sawmills. Estimates showed that the Swedes were in need of at least another SKr150/m3, and Baltic traders €16/m3, to reflect price levels obtained in other European markets and to keep UK supplies running into the 2nd quarter.
Sterling’s weakness is expected to drag down sawmills’ financial results for the 4th quarter of 2015 and the 1st quarter of 2016, which may lead some of the larger Swedish producers trying to compensate by going all out for an increased UK market share. Given the fact that there is a limit to consumption they might find it necessary to re-evaluate this strategy in favour of a wider market spread. This raises questions as to how much volume could be diverted, and what effect it would have on those other markets?
The demand for strength-graded softwood has generally been good in the UK, but supplies of middle lengths from both Baltic and Scandinavian sources have become short, leaving some distributors with gaps in their inventories. As one importer described the situation: "it is a typical aftermath of oversupply feeding unbalanced demand." The situation has also been aggravated by difficulties in logging, where wet weather has impeded extraction and extended production times at the mills.
Where solid softwood is still used as opposed to engineered wood, house builders erecting smaller units will be in need of increased volumes of mid-range joist sizes such as 47×200 3.6m. These specifications are also key products used in the house- extension market, and it is likely merchants will witness a greater demand for them rather than just the typical rack-stored length of 4.8m.
Although exchange rates are mostly affecting imported softwood, early signs show that the market for C24 is still set to grow, as it has become a separate product from C16 where the home grown mills retain the advantage. Nearly all forward enquiries from the merchant-importer sector now appear to be for pure imported C24 only, rather than a mixed grade.
Home-grown structural softwood producers were under pressure while the pound strengthened, but with the recent reversal they have a better opportunity to increase market share or follow imported prices upwards as the market rises. Overall UK softwood production dropped marginally in 2015 by 28,000m3 to 5,900,000m3 and according to UNECE estimates, it is set to recover by 150,000m3 to reach around 6,050,000m3 (+2.54%) this year.
Looking at the export data of the main softwood producing countries in Europe, Sweden increased volumes in 2015 by almost 770,000m3 (+6.34%) to 12,900,000m3 with a projection that the figure will grow again this year by another 100,000m3. The three Baltic States in combination also increased exports last year by 8.61% to just over 3,820,000m3, while Finland remained flat at 7,500,000m3. Exports from Russia rose by a further 324,000m3 to around 22,000,000m3, mostly driven by demand from China, but sales to the UK were reported to be firm.
In the joinery redwood market, demand is consistent, but prices are low and still reflective of oversupply. Many of the Nordic producers have increased their reliance on the North African markets which have weakened due to economic problems coupled with political issues and uncertainty. Recent reports reflect a gradual improvement in this market, and sawmills are hoping that they will be able to resume normal trading levels as the year progresses.
If prices in the UK do not increase at an acceptable pace, then shippers of both whitewood and redwood will focus harder on wider markets and a swing from oversupply to shortages could develop. This pattern of feast or famine cycles has plagued the trade for many decades and is an intrinsic weakness in the supply chain which has, in turn, pushed a huge share of the market towards composite and engineered wood products.
Current trends in construction are falling below projections, with February recording the lowest level of output for almost three years. A number of reasons have been given for this position, but national media reports paint a picture of uncertainty for the year ahead.
In contrast, repairs and renewal sector activity has improved over the same period last year, and a number of timber merchants contacted reported a busy January with the need to build stocks up ready for the spring. Irrespective of the immediate turbulence in exchange rates, Britain’s economic standing as the fifth largest world economy is likely to entice shippers to stay on board, and projections published by industry analysts forecast that the UK construction and house building industry will eventually grow to be the largest in Europe over the next 10 years, drawing in investment and underpinning confidence for the future.
The message coming from the market seems to be that a level of patience will be required by shippers to claw back the currency reduction in the UK. The question that needs to be answered is how long the timescale will be, and are they prepared to wait?
