Sustainable supply-demand balance will be the key

We are all witnessing the worsening of the western economies' outlook as confidence in the future is deteriorating. This will subsequently impact demand for sawn and planed timber products which has been poor throughout the whole year in many European countries, North Africa and the US.

I think it is fair to say that we are all concerned about the outlook for demand in the short and medium term. Recently I read that sales of US houses are expected to be as low as 319,000 in 2011.

However, long term the outlook looks positive as Chinese demand is growing, US housing starts will eventually pick up as confidence returns and stocks of unsold houses will reduce and the British Columbia mountain beetle will start affecting the regions sawmills’ production volumes. Some people have talked about a “super cycle” where timber prices could double.

During this year we have had high raw material prices in Scandinavia making the operational environment extremely challenging for sawmills. Sawmill companies' financial results are unsatisfactory, to say the least. Baltic companies have fared marginally better but the outlook remains unclear.

Due to the challenging financial environment sales price levels are important for the industry but more important at the moment are production volume adjustments in order to meet the future demand.

I would particularly like to mention the situation in south of Sweden. We have reduced our production at Jarl Timber by 50% to one shift from this August. This was a very unfortunate process we had to go through and many good, qualified and long term employees had to be made redundant.

The south Swedish sawmilling industry must reduce its production volumes further in order to be profitable and to be able to invest and develop sustainably.

Too high log prices and the strong Swedish krona have pushed the industry into a corner and the only way out of this crisis is by reducing production.

This will be a painful process but I do not see any other options. Otherwise, sawmills will continue to fight for the logs, keeping the raw material prices too high and then fighting each other on the market to place the volumes in an environment where demand is weak – pushing sales prices down…a recipe for disaster.

Besides the product itself it is important to mention service levels, long term supplier-customer relationships, delivery times and reliability which form an essential part of the package we offer to our customers.

The industry needs to continue investing and modernising in order to meet with customers’ demands in the ever-changing world.

Lead times must get shorter as stock levels throughout the supply chain are getting smaller but customers expect higher service levels. It goes without saying that the industry must be profitable in order to be able to invest and modernise itself.

Price increases are in the interests of all companies involved in the forest products supply chain but they must be based on a sustainable supply-demand balance.

And this will require the sawmilling industry to be much more flexible as far as production volumes are concerned and adjust supply to prevailing demand.

Sampsa Auvinen is chief executive officer of Norvik Timber Industries.