Price and demand trends could lead to Baltics shortages

Summary
¦ Mills are now raising prices by around €5/m³.
¦ Logistical costs are adding to timber prices.
¦ Latvian volumes to the UK have increased.
¦ UK trade is below expectations.
¦ Ice delayed some shipments to the UK.

At the beginning of 2011, the euro stood at around £0.82. Since then sterling has fallen consistently and is now valued at €1/ £0.88, a difference of more than 7%. With considerable volumes sold on a forward basis in sterling, sawmills have been absorbing exchange rate differences where currency purchases have not been covered, but now new price levels are starting to come through.

After a stabilisation in price during the first quarter, mills are now implementing rises of around €5/m³ for April shipments not already agreed, and expect the same again for May with a further premium in June. These increases barely reflect the currency adjustment needed to stand still, while in the background other markets are paying similar increases but without the compensatory factor for currency losses.

Shippers are determined to keep prices moving upward as they progress through the second quarter, and are unlikely to accept counter offers from UK buyers. They also expect to be able to export into other markets at better levels, even though North African buyers may be off the scene due to political uncertainties in several countries in the region.

Transport costs

Logistical costs are also pushing up timber prices. In Latvia, transport costs have risen by just under 5% since December, and nearly 8% against this time last year. These costs come on top of the steady rise in sawlog prices across both the Baltic and Nordic regions, which are also forcing up sawn timber prices.

Shippers expect rising demand from other markets to create a shortage of softwood, and buyers would be well advised to cover their requirements sooner rather than later.

Some agents are even predicting a rerun of 2006, when UK buyers found themselves bought short and were desperate for whitewood carcassing. At that time, prices rocketed to reach a new peak, even though the underlying demand from end users was below average. As a consequence, markets became supply driven, and it was only over-production in the global market coupled with a huge fall in US demand that finally capped prices.

In the last 12 months, Latvian mills have been rebuilding volumes with UK importers, and the overall exports of sawn softwood have increased, with an estimated volume of 1.75 million m³ predicted for 2011. Although volumes are below those shipped 10 years ago (2.9 million m³ in 2001), they have recovered from a low of just over 1.3 million m³ recorded in 2008.

Forest certification

In some cases, questions regarding Latvian forest certification have hampered trade because the original 2001 Latvian Forestry Scheme lost its PEFC endorsement in 2008. This was recently regained when the PEFC endorsed the Revised Latvian Forest Certification System. As foresters achieve compliance and gain individual certification, this should help to make up some of the lost ground.

UK trade appears to be below expectations despite improving weather conditions, and in some regions business is very slow. Cargoes from the Baltic states were delayed by severe ice conditions over the winter, which helped some buyers reduce stocks before having to finance new arrivals when demand was slow. Vessels are now arriving and discharging at UK ports, but quay distributors are catching up on existing commitments rather than experiencing a rush of new business.

UK trading

UK trading levels are generally reported to be a little ahead of last year’s figures, but few importers and merchants outside the south-east expect demand to increase significantly until 2012.

Many people in the industry feel that the rebuilding programme needed in Japan following the earthquake and tsunami will suck in timber from all producing countries.

Certainly there will be a knock-on effect that will accelerate shortages, but not all Baltic producers export directly to Japan. For those that don’t, there will be opportunities to supply growing gaps in other markets.

There are several exporters in the Baltic states that sell both timber and panel products to Japan, and they are expecting strong demand from the rebuilding programme.

Panel producers have already witnessed a rise in demand for temporary shelter construction as the clean-up operation is under way and, in contrast to lumber, prices of OSB and plywood climbed steadily in the weeks immediately after the Japanese quake – although some price vulnerability had crept into those markets by last week.

Looking back to 2006, importers will remember the difficulties in obtaining carcassing stock, but as the prices rose so did the interest from other producers. Currently the price of eastern SPF is dropping, and is trading around 6.5% less than this time last year.