Upbeat mood gives way to caution and confusion

Summary
• All sectors performed well from the start of the year.
• There was a slowdown in August, created largely by customers overstocking.
• Some UK mills reduced production in October and November.
• Concerns over log supply persist.
• Scotland’s environment minister has asked Forestry Commission Scotland to investigate wood supply for renewable energy.
• Some sawmillers are concerned that the biomass sector may compete for smaller sawlogs.

It's been a roller-coaster year for the UK forest products sector, with a rapid rise in demand and prices lasting well into the summer before the unexpected crest and heart-lurching descent left everyone a little breathless and wondering how the ride was shaped for the rest of the year and into next.

Continuing the trend of increasingly strong markets in 2006, all sectors performed well from the start of this year. UK mills producing carcassing, fencing, pallets and packaging all reported buoyant demand, with the usual early year lift in sales given extra impetus by shortages of imported material from Scandinavia and the Baltic states.

With huge demand from China, coupled with a mild winter that hampered harvesting in these supplier countries, the reduction in softwood available for the UK was significant and customers turned to UK mills to make up the shortfalls, almost with a “price is no problem” attitude. Evidence of the overall seriousness of the shortages was that coverage extended beyond trade media to television and the national newspapers – particularly on fencing, with reports of consumers fighting for products at DIY stores and of a black market developing.

Obeying the rules of supply and demand, prices lifted substantially. Increases of 10-30% were reported, and although the upper figure was the exception rather than the rule as far as UK producers were concerned, it is clear that double-figure increases were achieved.

Markets remained strong into the summer and mills were in buoyant mood, with expectations that demand would stay high for the rest of the year and into next.

The wave crested in August, with the beginning of a sudden slowdown. By September, according to one source, it was “like a door had been slammed shut”. That door has remained shut since then, affecting all three key product sectors for UK mills.

Caught out

It is not thought that there has been a significant reduction in underlying demand for softwood, but that buyers, having been caught out earlier in the year, have been determined to try and cover themselves from a repeat performance. Significant purchases have been made over and above what is needed to meet current demand with a view to building stocks – and that includes placing orders for material and asking the mills to hold it for later call-off.

In addition, softwood has been arriving from Germany and Austria. There has been a substantial increase in German production as new mills have come on stream, and the thinking is that the country could become a regular supplier. Germany and Austria are reported still to have a considerable amount of windblow easily accessible – perhaps enough to last another six to nine months although the quality of these logs will be deteriorating, so how long they will remain suitable is uncertain.

What is clear is that the strength of global demand and firming prices has allowed these countries, as well as Canada - there are reports of volumes of Canadian material on the water – to find it economically viable to sell to the UK.

After the euphoria of the first seven or eight months of rising demand and prices, it took just four to six weeks for everything to change, and the mood now is one of caution and confusion. Prices have inevitably weakened as a result of the slowdown in demand, although it is not known by how much, and some UK mills took the unusual step of curtailing production for periods during October and November.

The year ahead

The general view of UK mills seems to be one of getting the rest of this year out of the way and hoping for a resumption of trade in 2008. Certainly global demand, not least from China, is still strong, and if this winter is as mild as last, imports from Scandinavia and the Baltics could be affected again.

However, 'ifs' and ‘maybes’ say it all. Nobody knows. At worst, the hope is that 2008 will see positive but more 'normal' trading after the unusual peak of this year.

Despite the 'pause' in demand, there has been no lessening of concerns about log supply. There are questions about the volume that will be available from public forests, and a belief that the private sector will have to play an increasing role.

Above all, there is a need for reliable and continuous supply and the challenge is how to work with private growers to achieve this. Falling prices for the mills inevitably mean harder negotiating on logs, and if growers aren't happy with the return they may simply withdraw.

Until the third quarter, private growers had seen a better year than any could have imagined, with a definite reversal of the previous downward trend in standing timber values. But the shuddering halt to sawmill sales in August/September affected demand for logs and the hope now is that this will prove a short, sharp reversal of fortunes rather than the beginning of a long slide.

However, while growers are concerned about current prices the full impact has barely been felt. That is because it coincides with the time of year when log sales traditionally slow down as the attention of the private sector turns to the shooting season, which runs from October to January.

Demand from fencing producers also slackens around this time and, possible winter storm damage apart, the sector awaits the usual hoped-for upswing in Easter. For construction timber, of course, the economic ramifications of the US sub-prime market problems have added to the overall growing air of pessimism.

Growers know there is a lot of sawnwood stock around and, with some mills talking of three-week closures over the Christmas period, starting around December 14, they are looking to delay their programmes if necessary to wait for markets to recover in the new year.

Impact of biomass market

And they are not unmindful of the biomass fuel market. The £90m biomass power station at Lockerbie is in the final stage of testing, after which the plant will be signed off and begin commercial operation. It is designed to generate 44MW of electricity, enough for around 70,000 homes.

It will need more than 480,000 tonnes of oven-dried fuel each year – that's more than 9,000 tonnes of new demand each week. That is planned to comprise 20% recycled fibre and 20% short rotation coppice, with the balance being co-products and small roundwood.

During the busy first months of the year, sawmill co-products were plentiful and able to meet demand from board manufacturers as well as wood-fired power systems. With the decrease in sawn timber demand, so the supply of co-products is also reducing.

Chipboard manufacturers have been expressing concern for some time at the competition for raw material from biomass plants. Their potential buying power, supported by the government's renewable energy commitments, could see displacement of material from chipboard production to power generation.

As a growing new market for co-products and small roundwood, sawmills and growers have been viewing biomass plant with optimism, but now there are mutterings among some in the sawmill sector about the possibility that the requirement and buying power of the biomass sector could even see competition for some of the smaller sawlogs. Suddenly, the emergence of biomass demand looks like a double-edged sword.

Renewable energy task force

In June, Scotland's environment minister Michael Russell announced that he had asked Forestry Commission Scotland to convene an industry-wide task force to consider how to increase the supply of wood for renewable energy production. The report was due to be presented mid-December but, although ready, has been delayed until early January as a result of the minister's diary commitments.

One such source would be brash from forests but, although there is certainly a lot of this, the volume that could be directed into power generation will vary depending on the site; some of that material is needed to provide a 'platform' for harvesting machinery. The thinking seems to be that estimates of the amount of such wood, which previously had no market, were too optimistic.

According to some industry commentators, one of the recommendations of the task force is likely to be that there is still a lot of wood material going to waste – demolition waste, some packaging and arboricultural material such as tree surgeons' cuttings – and that more focus should be on capturing this as a resource for power generation.

The problem here is that while such waste is thought to be still significant, it's likely that it is concentrated in London and other major conurbations – highlighting once again the impact of devolution in creating separate bodies, such as the Forestry Commission, for each of England, Wales and Scotland, when the forest products industry is a UK-wide business that requires an overview organisation to aid more efficient research and gathering of information.