Summary
• Softwood stocks are high and prices have fallen.
• The sources of supply have changed.
• The state of the UK property market will have an impact on the sector this year.
• The RMI market is growing.
Apparently, a ride on an original softwood roller coaster is a shake, rattle and roll experience. After the last year’s trading, UK softwood suppliers may have some idea what it’s like.
In early 2007 softwood shortages and price rises were big news – even making the front page of the Financial Times. But now famine has turned to feast. Shippers have high stocks and are under pressure to sell and prices have come well off their peak.
Snows Timber managing director Jim Peryer described the market swing as “extreme”. “We had peaks and troughs in the previous 15 years but business overall was relatively flat, underpinned, perhaps, by artificially low prices,” he said. “We haven’t seen a movement from shortage to this level of oversupply in a long time.”
KDM International chief executive John Grave agreed that the volatility had made life “uncomfortable” for some. “One month everyone was talking about lack of supply, then it all came over at once and we started getting calls from Swedish mills which previously couldn’t supply us,” he said.
The detail within this broad picture has included greater fluidity in the sources of supply to the UK. After a long break, Canadian softwood returned in some volume to fill a gap left by falling US sales, only largely to drop off the market again. Newcomers, notably German and Austrian mills, also appeared to capitalise on healthy demand and rising prices and, like the Canadians, to offset the US downturn. Meanwhile, some established suppliers, including the Baltic states, were squeezed.
UK property market
A key influence on where the market heads next will be the state of the UK property sector. Some media forecasts on this have been pretty downbeat. However, feedback from the softwood sector seems more measured.
“You have the media talking us into a housing downturn, and yet another source recently reported that property prices were still rising,” said Rowlinson Timber managing director John Bate. “At the same time the activity in our sales office was busy and positive.”
“We’ve seen call offs from volume housebuilders slow down, but it’s difficult to make predictions in January/ February,” said Mr Peryer. “If housing is still down in April/May, then we could say it’s going to be tough. Currently we’re reasonably busy and overall market conditions are not bad; people still have jobs and interest rates are low. Also, builders haven’t yet cut prices. If they did, they could tap into some pent-up demand.”
At the same time, he added, Snows and sister business Crendon Timber Engineering are involved in construction sectors other than housing and these are holding up. “It helps to have a broad church,” he said.
With some companies selling softwood “under replacement value to ease cash flow”, Mr Grave believes further interest rate cuts are needed to get confidence back into housing. But offsetting market jitters is the UK’s trend to timber-based construction methods.
“Consumers are looking to alternative methods of construction and we can see that in increased interest in our Svenskhomes range of Swedish timber houses,” said Mr Grave.
Timber building boost
Gill & Robinson managing director Ian Robinson also pointed out that timber frame is increasingly favoured in the social, affordable housing, which should boost demand for TR26 and CLS. “And if the volume of new housing slows down, the volume in RMI invariably rises,” he said.
Finnforest UK managing director Rod Allan maintained, in fact, that home refurbishment and extension business is already growing, “consuming a substantial amount of constructional as well as second fix timber products”. “Demand should therefore stay strong even with market dynamics changing,” he said.
On the supply side, the US economic slide is still a key influence. That’s partly because it is undermining international business and consumer confidence, but also because timber continues to divert from the ailing US construction sector to alternative markets, including the UK. According to the UNECE, North American sawn softwood consumption fell 11% last year and US imports 17.1%. That’s a lot of timber looking for a new home.
Mr Peryer said the increase in softwood targeting the UK is also the result of falling demand in the Middle East and Japan. And Mr Robinson predicted that Egypt would also “pause for breath once 500,000m³ of Russian stock at Black Sea Ports is shipped there”.
But whether the new suppliers are in the UK for the long haul remains a matter of debate.
“When you eventually see a US upturn, many will revert to type and head back there,” said Mr Grave.
Mr Bate agreed: “This time last year you could get timber from a variety of countries, so the recent and sudden departure of Canadian suppliers has come as a shock to some and although Germany and Austria are still big in supply, this won’t last forever. Sourcing timber from the Baltic states and Russia is more complicated, which puts many smaller importers off, but for customers it should represent a reliable and sustainable source of timber.”
Some of the new sources, he added, are also now being hit by the downward pressure on UK softwood prices and the strength of the euro.
Mr Robinson agreed: “Traditional German business in long lengths, large sections and scaffold boards will continue, but bulk selling of German and Austrian carcassing won’t compete with cheaper Swedish material.”
Never say never was one take on whether the 2006/7 resurgence of Canadian exports to the UK would be repeated soon, but most feel it’s unlikely.
“The increase in Canadian imports was due to special circumstances: the downturn in American market combined with strong UK demand,” said Mr Peryer. “But they were shipping material that wasn’t the standard we now expect as the norm and their take on environmental certification is different. Now we’re in oversupply, it’s difficult for a mill halfway up the St Lawrence to compete with a switched-on Swedish supplier which can deliver the right specification in two to three weeks.”
Another key topic in the international softwood market has been Russia’s imposition of duty increases on roundwood exports to boost its own processing sector. This, say traders, is likely to impact on German, Baltic and Finnish sawmills in particular.
On the future for the Baltic/UK trade, views are divided.
“I don’t think in the short term it will come back in a big way,” said Mr Grave. “Importers have been scarred by inconsistent supply and there are questions over capacity.”
John Bate, however, believes talk of the demise of Baltic trading links is premature, at least as far as Rowlinson is concerned. “We have an interest in this market with our business in the Baltics, but some reports on this are just wrong. We’re still receiving regular offers of substantial volume and the feedback from Baltic mills is that, if we stick with them, they will supply.”
Baltic commitment
Underlining continuing Baltic commitment to the UK, he added, Rowlinson recently hosted a trade delegation for more than 40 Baltic and Russian representatives (p10). “It highlighted their interest and bore out our belief that they can continue to be important suppliers,” he said.
Looking to the second half, the belief is that, given a fair wind in construction, the changing international supply picture and lower prices in the UK (according to Mr Robinson, they’re now the lowest in Europe) will combine to ease softwood overstocking.
“Production is also being taken out, particularly in the Nordic countries,” said Mr Peryer. “The mild winter in the Baltics, Sweden and Finland will further restrict supplies.”
Mr Allan said that the risk now was of companies “looking for volume” by lowering prices, but he agreed that the immediate outlook is more stable.
However, while the softwood roller coaster appears to be slowing, recent supply fluctuations seem to have reinforced a belief that, longer term, the sector may be entering a more unpredictable, competitive era, particularly with growing demand in the emerging industrial powers, India, China and Brazil. Underlining this, perhaps, are traders’ plans to develop their businesses.
Diversification is one favoured route. KDM, for example, is expanding its manufactured garden products as well as its timber house business. “Companies that have weathered recent turbulent market conditions well are those prepared to seek new markets, while remaining focused on traditional core business,” said Mr Grave. Gill & Robinson, meanwhile, has just secured exclusive new agencies for a Dutch laminated board producer and an upper gulf mill. “We also see opportunities for mergers or acquisitions,” said Mr Robinson.
Besides developing its product portfolio, Snows’ strategy includes closer partnering with suppliers. “It’s a two-way street,” said Mr Peryer. “We also have to deliver value to suppliers.”
Mr Bate believes the trade also needs to have “a more thorough understanding of worldwide softwood procurement in order for producers and suppliers to have a more viable ongoing future”.
The future for Rowlinson, meanwhile, will be about becoming “ever more professional and willing to adapt”. “The longer term could see the company repositioning in ways that might surprise people,” said Mr Bate.
