Supply famine gives way to feast

Summary
• Fencing demand dropped off suddenly in mid-summer and now many companies have high inventories.
• Demand for round fencing for the industrial and agricultural sectors is still robust.
• Fencing may still be needed in areas affected by the summer floods.
• Many mills are reducing pallet timber production.
• UK demand for pallets is holding up.
• A revision of ISPM 15 is likely to be out for consultation after May.

The UK fencing industry will put 2007 down as one of the most contrasting years in living memory. As recently as the early summer, strong demand was chasing scant supply; but since then, the market has been turned on its head and timber stocks are proving to be an overriding concern for, in particular, those fencing manufacturers supplying the domestic sector.

As previously reported, fencing material sales figures for the first half of the year were some of the best on record. In response to the limited availability of fencing timber and talk of enduring shortages, buyers were prepared to pay ever-higher asking prices to secure their raw material. Many over-bought as insurance against both heavy demand and the possibility of a proportion of their orders failing to arrive owing to the highly-competitive nature of the market.

Such thinking was understandable at the time but did not allow for the sudden, mid-summer drop-off in fencing demand. Availability of fencing timber duly increased and earlier orders were largely completed in full, leaving many companies with uncommonly high inventories at this point of the year.

Market extremes

It has been a “nothing or all” year in terms of supply, according to one fencing manufacturer. “At the start of the year, all the mills had full order books and we didn’t get any offers from them,” he said. “Since August, we have been offered material at prices 30% lower – but we haven’t been able to take advantage of them because we already have enough stock to meet a lacklustre demand.” Another fencing contact added: “People are now sitting on a lot of over-ordered stock – and whether we like it or not, that stock has to be traded through the system.”

Material that would have evaporated almost instantly earlier in the year is now proving difficult to shift. As an example,

one contact pointed to a substantial consignment of fencing timber brought in from Canada when availability was limited. “Some of this still seems to be hanging about on the quays,” he added. Others reported instances of UK importers reneging on – or trying to renegotiate – timber contracts with overseas suppliers.

A multiplicity of reasons has been offered for the abrupt reduction in demand from the domestic fencing sector, notably generally disappointing summer weather and heightened financial worries among home-owners as a result of the Northern Rock bank debacle. The slower pace of house price increases will have discouraged many owners from investing heavily in their properties, it is also claimed.

Weight is added to these opinions by reports of continuing strength in other, non-domestic fencing markets. For example, demand for round fencing from the industrial and agricultural sectors is proving relatively robust, with prices largely holding at the peak levels established earlier in the year.

Domestic demand

On the domestic side of the business, by contrast, prices to end users are claimed in some quarters to have fallen 25-30% from their peak levels, although other companies argue that the impact on them has been less severe because they opted not to raise their prices to those same peaks in the first place. Meanwhile, a leading UK mill operator said that prices of feather-edge boards sold into the fencing sector had fallen more than 15% since the start of the autumn.

According to one contact, there has been no real change in saw log sales prices into the fencing manufacturing sector although he acknowledged that some weakness was anticipated over the coming months. Another argued that there was no reason for a fall in fencing material prices because log prices in the UK and elsewhere remained relatively high; however, he added, there had been evidence of “weak selling”.

The contrast between trading conditions in the first and second halves of 2007 has been truly stark. However, some industry contacts remain optimistic on the grounds that a pent-up demand could still exist for fencing in many areas affected by the summer floods and that Easter will be in March next year to give the market an early, traditional boost.

Bullish predictions

Some are sceptical about calls going out from suppliers urging fencing stockists to place early orders for the 2008 season to help avoid the shortages witnessed earlier this year. They point out that Easter demand, ironically, could yet be undermined by poor weather conditions.

However, a leading supplier of fencing products into the major retailers remained steadfastly bullish. His company’s sales of fencing panels have been 185-190% ahead of budget during 2007 and are still exceeding expectations for this time of year – possibly because of post-flood repair demand, he said.

While acknowledging that fencing product prices had reached a plateau, he asked: “People are prepared to pay for the panels, so why drop prices?” The need to maintain sales prices had been heightened, he added, by substantial increases in key cost areas, notably the impact of higher oil prices on distribution.