Mild and wet weather is continuing to hamper logging in the Baltic, leaving many mills short of sawlogs. Prices for the timber that is coming onto the market are increasing, and the small feeder mills, which the larger exporters rely on to supplement their own production, have been struggling to make ends meet.
The achievable price levels for sawn goods have been too low to cover the log costs and pay the overheads. This has led to predictions that the contraction in the smaller sawmilling sector that we’ve seen over the last year will continue.
While things remain difficult in the Baltics, prospects in the UK have been dampened down and the demand for carcassing softwood has tailed off.
January proved to be a quieter month than most people expected, and the stormy weather did little to help matters. February started with gale force winds and heavy rain, which caused a ship laden with timber to become beached off the Cornish coast (TTJ February 9). Fortunately the Russian crew were winched to safety, but much of the cargo washed overboard.
Building abandoned
The weather virtually killed all construction activity, with building sites abandoned as they became muddy and waterlogged.
The resulting downturn in demand has caused some importers and merchants to reduce selling prices in a bid to grasp what sales they can. But this tactic is completely at odds with the forward supply situation, where the exporting mills have maintained the price increases achieved during the third and fourth quarters of last year. They are still looking for higher prices, but there is little chance that importers will accept further increases until the market shows signs of picking up.
One agent confirmed that some importers had requested delays in shipments from the Baltics in a bid to reduce stocks until things were likely to improve. By putting cargoes back until the last week in February, they are hoping to realign arrivals to coincide with a rise in demand.
In addition to the current high price of sawlogs, the Baltic shippers are still struggling with the weakness of sterling against the US dollar and this is creating further pressure for a price increase to the UK market.
The squeeze between high log costs and low sawn timber prices has dented the profitability of the larger producers as well as the small operators. In Estonia, the Toftan mill, which is the third largest in the country, reported that profits had fallen during 2001. This was a direct result of raw material prices and the mills are in no mood to see the price of sawn timber weaken in 2002.
Toftan, like many other Baltic sawmills, is benefiting from a general strengthening in the domestic economy as local demand increases. The mill has an annual capacity of around 95,000m³ and exports are a large proportion of its production. Last year, exports were below 50% of production, compared with just over 70% in 2000.
Latvia’s economic situation has been highlighted by the IMF recently, and it is now a leading candidate to enter the EU. Figures to date suggest that the economy grew by almost 9% during the first six months of 2001, while most other countries experienced a slowdown.
This background, combined with the proposed legal reforms to the country’s commercial law, which are intended to give stronger protection to creditors, will encourage further investment in industry and there are signs that the forest products sector is still set to expand.
Timber complex
In addition to the reports of sawmilling investments made before the end of last year (TTJ December 15/22, 2001), a new project is under discussion at the Latvian port of Ventspils (TTJ February 9). A timber complex is to be built over the next six or seven years by a partnership of Latvian, British and Russian interests.
The project, which will boast the most up-to-date German technology, is planned in three phases starting with the construction of a redwood mill which will source raw material from the north-west of Russia. This will be followed by a planing and laminating plant and an MDF mill. The redwood mill is expected to reach a production level of around 180,000m³, with 110,000m³ of wood chips for pulp. Quality and standards will be aimed at levels acceptable in the EU.
The Latvian arm of the company, Ventspils Lumber, has acquired a leasing option to the new site which amounts to around 30ha of land within the port. Ventspils is also a free port, and the company intends to apply for licences which will assist in customs and tax related matters. Financing arrangements are reported to be in place, so it is likely that the trade will see the redwood production on the market in 2004.
The sourcing of logs from Russia is a practice that has been employed throughout the Baltic states for many years. Raw material costs are cheaper than home-grown supplies, but transport and cross-border tariffs have discouraged some sawmillers from attempting to import. The transport of goods by railway is said to be more than 10% cheaper to Russian ports than across the border to foreign ports such as Riga.
The Latvian state railway Latvijas Dzelzcels transports over 35 million tons from Russia to Latvian ports, but it has the capacity to increase this volume significantly if rates could be made more competitive by the equalisation of inland tariffs.
According to a report in the Baltic press, an equalisation of tariffs is linked to Russia’s entry to the World Trade Organisation and action is expected to take place in July. This would increase cargo volumes to Baltic ports and enable Latvian planing mills and treatment plants to use the higher quality Russian pine and spruce to re-export to other markets such as the UK.
Log export limits
There are other problems associated with the export of Russian wood via external ports, including proposed restrictions by the Russian customs authorities which would limit the export of logs by road and rail. Last October, 107 border checkpoints were approved by the Customs Committee, and any restrictions are likely to take effect from mid-March.
Some Baltic mills are concentrating on value-added products, such as planed goods and fencing panels, in order to deflect from difficulties in the sawn softwood market. Many see their longer-term goal as selling to other markets, in particular the US.
For the time being, the UK remains the most important market to the Baltic sawmillers, and even more so at present because other European markets such as Germany have weakened considerably.
Those mills that are trading with the US are enjoying better returns on whitewood as CLS. One large mill in Lithuania has been investing in this market for a number of years and, with high quality whitewood, has managed to sell into the premium rate market which covers the DIY outlets. This higher end of the market is usually worth an extra US$50/m³ over and above general whitewood selling levels.
Latvian spruce has been approved as a species by the US grading certification body, which now creates an incentive to the mills to apply for grading licences and join the export drive to the US market.
Treated products
Turning to the forward market, a number of agents have commented that contracts for fencing and landscaping specifications have been increasing over the past three months, for arrivals starting in late February through to the end of May.
Many shippers in Latvia and Estonia have been trying to promote treated products such as decking, rather than just selling basic unseasoned sawn specifications which have been close to loss-making. However, while the trade starts to reap the rewards of promoting treated timber to the consumer, a serious situation looms in the corridors of Brussels in the form of a ban on CCA treatment.
This contentious subject has already been well publicised. If the ban were to be enforced in the EU within the next two or three years, it would have a devastating effect on the timber market. Several Baltic producers who have invested in treatment plants would be severely hit, along with all the UK processors supplying the building, agricultural and industrial markets.
Much hope rests upon trade associations making their voices heard at government level against the proposed legislation; and also on the research being carried out by chemical manufacturers into cost-effective alternatives that could be used in the existing plants.
