Positive for construction

Noble Francis is economics director at the Construction Products Association

This year should be a positive one for the UK economy and construction industry. We’re forecasting 2.6% growth for the UK economy and 3.8% growth for construction. This growth for the industry is expected to be driven by the three largest construction sectors but isn’t without risks. Private housing has been the fastest recovering construction sector. Starts have risen 43% since 2012 and are expected to rise 5.0% this year as house price growth and government policies to enable more demand mean that the house builders can increase supply without hindering land value and unit margin.

The commercial sector is also set for growth this year, by 4.5%. There has been a burst of activity during the couple of years in the offices sub-sector due to projects in the capital but this has been joined by projects in Birmingham and Manchester. Retail construction should also be boosted as consumer spending continues to rise.

Infrastructure rose considerably in 2015 and 2016 should see growth of 7.6% and although most firms think they don’t do work in this sector as they work on HS2 or Hinkley Point C, remember that a lot of this work is for smaller buildings supporting the infrastructure so they can still benefit.

Risks to growth revolve around skills shortages and the EU referendum. Skills shortages have already been seen for trades and managers onsite in house building but growth in other sectors means even greater demand and skill shortages could hinder this growth. We have an EU referendum coming up in late 2016 or, more likely, early 2017.

Whatever the result, the months beforehand will be affected by uncertainty. Companies don’t like uncertainty and neither do consumers so don’t be surprised if we see a slowdown in business investment and consumer spending, which could adversely affect private housing and commercial.

Joinery sector hopes

Roy Wakeman is chief executive of the Performance Timber Products Group

Looking ahead to this year and what we might want is difficult but we should just reflect on the year just ended. 2015 was a better year for the joinery sector, with demand driven by economic recovery and increased investment in private housing.

The crisis in the housing supply side meant that the government had to address it, and we saw some stimulus added by way of Help to Buy aimed at the first time house purchaser. To some extent this worked, but the supply side has not really addressed the shortage as we seem to be more than 100k units short of the minimum requirement to satisfy the demand. This results in house price inflation well ahead of all other major cost factors. We are likely to see this scenario played out again this year and we see that the private investment side of construction project demand is also forecasted to grow by 3 to 5% (CPA forecast). This will be good for joinery.

The application of e-commerce to the process of supply is well and truly established in my view, and we shall surely see this making a bigger impact going forward. Online configurators and design systems such as BIM will be more widely used to help keep our industry at the same pace as the rest of Europe and hopefully some of us ahead.

We are finding that price – once the barometer of volume related demand – and the only marketing tool which was used unintelligently is now much outdated. Well-researched plans make promotion and marketing a real feature of the industry today and are great to see. But we still see companies trying to grow market share by price alone. What they forget is that customer service, quality and performance has to come hand-in-hand.

My hopes for the New Year and much beyond this is that the industry comes together as an integrated supply chain speaking with one voice to inform and educate the market so as to grow the demand for wood and timber products way beyond competitive materials.

Demand for quality timber

Chris Watson is managing director of John Brash

Issues surrounding the rising demand for quality timber will come to the fore in 2016.

Globally, although overall demand is weakening as the Chinese economy slows, there has been a paradoxical rise in the requirement for better-quality timber – especially in China, which is being driven by the aspirations of its burgeoning middle class.

As a result, competition in the whitewood market is being ratcheted up. We are also seeing a massive oversupply of redwood, which is weakening prices – but all the indications are that this will start to rebalance from Q2.

In the UK, at one end of the housing market spectrum, the recent government announcement outlining ambitious affordable housebuilding targets will inevitably lead to an increase in demand for raw materials – such as timber (there’s been widespread speculation about whether the 300,000 new homes target set by Chancellor George Osborne is achievable because the bigger fly in the ointment will be the dearth of skilled tradespeople to build them!).

Unprecedented demand for raw materials will challenge the robustness of supply chains and there could be echoes of 2006 where timber supplies became so limited that businesses without strong, established relationships with timber suppliers could not get any stock.

If this is not managed carefully, it could leave the door open to a flood of imported timber from regions where timber does not meet UK standards. This will undermine the UK’s efforts to drive up overall standards. At the other end of the UK housebuilding spectrum, the relentless increase in the construction of £1m-plus apartments in London and the South East is leading to ever-higher expectations around the quality of wood, such as the rise in specifications for knot-free timber for aesthetic reasons.

Softwood Oversupply factor

Kevin Hayes is managing director at AKZ Timber

The first few days of 2016 have been surprisingly active which we hope bodes well for the rest of the year. Merchant/importers are lacking in confidence both on joinery and construction products to place volumes far ahead so their short-term views mean little and often for suppliers.

The main issue facing the UK timber market is oversupply and this is likely to continue until well into the New Year, at least until other markets around the world start to show improved activity. The larger sawmilling groups are notoriously poor at controlling production volumes and with other markets in the doldrums, the UK remains the focus of attention. Despite a positive 2015 and a very decent outlook for 2016 in terms of UK construction sector demand, this is likely to prove the dampener for timber products. However, should other markets wake up the situation could change very quickly and there are some factoring in possible timber shortages as we go further into spring and summer.

The continuing pressure on timber producers to ensure products are fit-for-purpose and indeed able to compete with other building materials will certainly not go away.

Already in the imported structural product we’ve seen a switch over to C24 grade only becoming the norm and other product enhancements such as pieces having lengths stamped on the ends for easier yard sorting. No longer is it acceptable to supply uncertified product. In addition producers need to prove EUTR compliance and supply other evidence to support regulations such as CE marking. Undoubtedly we’ll see more of the same in 2016 which, although onerous for suppliers, has to be a big positive for the timber industry overall.

So uncertainty clouds the horizon but we, along with most suppliers I suspect, are expecting 2016 to be very much along the lines of 2015 with that quiet hope perhaps for even some slight improvement.

Looking for sales growth

Jonathan Fellingham is managing director of Donaldson Timber Engineering

2015 has certainly been an interesting year. After encouraging growth in 2014, we all hoped that 2015 would continue in the same vein, but sadly the market has been decidedly flat.

As predicted, the general election had a negative effect on the market in the first half of the year, and disappointingly, it never picked up after May as we had expected.

We have seen good growth in Northern England and Scotland thanks to the economic effects of last year’s boom in the south gradually making its way north, but a slowdown in housing starts in the south of England has certainly had an impact on the market.

This partially leads us to expect that we may see some contraction in the north in 2016, and with the south looking to continue in the same way as 2015, the outlook for this year doesn’t appear as hopeful as we would like.

Planning issues, skills shortages and an overcapacity of engineered joist production have certainly had their part to play in the disappointing year. Furthermore, raw material has continued to reduce in price, and although this delivers short-term benefits, it typically leads to long-term pain due to the difficulty in raising the price at a later date.

Nevertheless, we’ve had a very strong performance at DTE in 2015. While sales have been slightly down on 2014, we have experienced our best year on record, and legacy orders have ensured that our margins have been strong.

So, 2016 will have its challenges, but it’s certainly not all doom and gloom. The CPA is forecasting a growth of more than 3%, which is usually a reliable statistic.

We’ll all be happy if we can maintain the current levels of profit, but it would be good to see sales increase in 2016.

Here’s hoping for a brighter year ahead.

Turning the currency key

Stuart Goodall is chief executive of ConFor

2014 was an outstanding year for the UK forest and wood processing industry, while 2015 was much more ‘challenging’ – to put it mildly. As 2016 kicks off it looks like it could fall inbetween those years. A key factor will be exchange rates.

From 2010-14, UK mills secured 40% plus (by volume) market share, and deliveries to mills reached a record 11 million green tonnes. A weak pound made UK sawn timber and panels very price competitive, and mills benefited from previous investment, providing higher quality products and stronger service. But sterling’s rise from around €1.10 to over €1.40 swung the pendulum to imports.

But, while it’s difficult to forecast for sterling, there are now signs it won’t be as strong. UK growth forecasts have been downgraded and the chancellor has warned of a ‘dangerous cocktail’ of economic risks. If the Greek economy can remain more stable and a stagnant Eurozone show some movement, the Euro’s recent strengthening may continue, offering respite for UK producers. It is now around €1.34/£1, close to the 1.30 viewed as competitively significant.

With the present exchange rate and seasonal slowdown UK mills are still running at reduced capacity. Raw material prices are also holding up strongly, partly because energy sector demand. This demand has strengthened prices for sawmill co-product and incentivises new afforestation. However, it’s a difficult silver lining to accept when margins are being squeezed.

Early 2016 is likely to be flat as we get through the winter, but once construction picks up in the spring we’d expect demand and price to strengthen.

So it appears likely that 2016 will be closer to 2015 than 2014, especially in the kiln-dried carcassing sector. The question is whether exchange rates will enable UK mills to be price competitive at a level matching raw material cost.