Exports steady but rates rise could rock the boat

Summary
• Some mills are cutting more whitewood because of a shortage of redwood.
• Competition has forced Russian redwood prices down in the UK.
• On the forward market Russian shippers are trying to command higher prices than their Nordic counterparts.
• In the UK, local authorities' moves to reassess business rates in ports will put pressure on timber operators.

Russian trade has remained steady since January, with most mills accessing enough raw fibre to satisfy production. Redwood logs have been in shorter supply, causing northern mills, in particular to cut a higher proportion of whitewood. This is not ideal, because, since the last report, whitewood inventories have remained high in the Archangel and Onega regions, with specifications left over and cut to specific sizes for markets such as Holland and Ireland.

Global excesses of stock, combined with lower demand, have put huge downward pressure on whitewood prices, but Russian shippers have maintained their position better than most by resisting an all-out capitulation.

In the St Petersburg region, fresh-cut dimension stock has weathered the price battering far better than kiln-dried goods, and the shippers have maintained a more bullish stance. As one agent described the situation "the unseasoned mills have remained almost aloof from the rest of the market, even though demand has weakened".

The main strength of these shippers is their ability to cut a variety of sizes and lengths outside the scope of most Swedish mills. They also remain more competitive in the bulk markets for larger sizes and lengths up to 6m than similar mills in France and Germany, where these more demanding specifications are converted from expensive and selected logs.

While northern shippers have benefited from cold winter conditions keeping the ground firm enough to support foresting operations, wet weather in the south has made harvesting difficult and affected the roads. Every year Russia imposes restrictions on vehicle weights while repairs and resurfacing take place, but this year the poor conditions have resulted in lower levels being imposed. According to some shippers, this has affected deliveries from the mills to the quaysides, and all industries are suffering, not just timber.

Redwood prices

In spite of shortages in specifications, Nordic competition has forced Russian redwood price levels down in the UK, even though exchange rates and soaring freight costs dictate the need for an increase. Ongoing weak demand has forced traders into a pattern of short-term buying, and this has slowed interest in the forward market. As one importer commented, "when customers want a specification, it is very specific and usually required the next day, but we are still fighting to get the right price".

In reality, most traders agree that there is little chance of stimulating the market by price cuts. The main issue is poor demand, and traders are hoping that some dry weather will bring buyers into the market this month. Demand for decking has yet to take off, and some importers and merchants are still holding last year's stock. One importer said that it was just a case of toughing things out, but there was been some improvement in the merchant sector in April, and it is hoped that business will continue to pick up more generally.

On the forward market, Russian shippers are trying to command higher prices than their Nordic counterparts, and most notably they are asking a considerable premium for redwood 5ths or C grade that far exceeds the current levels of Scandinavian 6ths.

It is unlikely that any of the mills will accept contracts at a loss, so production could be wound down in several areas. Russian mills are not bound by the same constraints as their counterparts, and they have more flexibility in terms of labour relations and legislation. It is easier for them to cut production and let the workforce switch to other employment, and then re-employ them when things improve.

Reassessment of rates

With a return to short-term buying in the UK, and the ever-increasing difficulties relating to shipping and logistics, terminal operators have become the most effective route for Russian imports. However, a move by local authorities to re-assess business rates within the boundaries of all 59 ports in the UK threatens to make these operations more costly.

Over the past week, businesses have received demands for thousands of pounds, in some cases millions, backdated to April 2005.

Associated British Ports controls 21 of the UK’s facilities, and within its estates are hundreds of forest products companies, stevedores, forwarding agents, and shipping companies. In Hull, several timber-based companies have already been asked to pay a revised business rate and it will only be a matter of time before all the other ports are included.

Although it is hoped that there may be some success in an appeal against the backdating of the charges, some shipping companies have already warned their customers of the need to raise handling charges.

Charges for timber imports are likely to vary according to the volumes; for the busiest ports, they are expected to reflect a minimum increase of around £1.50/m³ for the next 12 months. Where volumes are much smaller, increases are likely to be more substantial.

This will create substantial problems for all of those companies affected. In the timber industry, where prices and profits have been falling for the past six months, this could not have come at a worse time. Russian terminal distributors will be forced to reassess their future selling margins as will Scandinavian and carcassing quay operators.

For the quayside operators, it is now more important than ever to see the selling price of softwood recover, sooner rather than later.