Summary
• Baltic production has been reduced by around 25%.
• Sawn timber prices have recovered slightly.
• Exports to the UK are limited.
• Log prices have fallen since the start of the year.
• There are few spruce logs available in state auctions.
The Baltic sawmilling industry has been under severe pressure from all directions for the past 12 months. High inflation running through the regional economy has pushed up operating costs, but low selling prices, combined with expensive log supplies, led to an imbalanced financial situation.
This pushed many producers into the red, causing mill closures. Weak demand also pushed turnover down, and mills that planned to stay in production for the longer term cut back shifts and trimmed stock levels to an absolute minimum.
In the current market, the selling prices of softwood have started to recover, due mainly to global shortages rather than an increase in consumer demand. But this improvement does create a new trading platform for those sawmills still operating, and provides opportunities to ship at a profit rather than a loss.
Inventory levels
In common with most of the main exporting countries of northern Europe, inventory levels at the Baltic mills are low and production has been cut by at least 25% (on average) across the board. Producers are keeping a tight rein on cutting schedules, and contracts are being restricted to quarterly, rather than longer-term agreements, due to uncertainties in demand and pricing structures on the forward market.
For the better quality productions, whitewood carcassing has already improved by around £25-30/m³ from its lowest point in the last quarter of 2008, and shippers in both Sweden and Germany are sold out on several items, including boards, which are completely off the market until the end of September.
Baltic log prices have reduced considerably in cost since the beginning of the year, although there have been some recent increases averaging €7/m³ in the round. The industry expects a further firming but not an escalation, so, in theory, margins for sawn softwood should remain profitable for the foreseeable future as the price of sawn timber is expected to rise further.
There is one notable problem that will affect Latvian shippers and their customers, and that is the log mix. There has been a recent fall in the volume of spruce logs available at state auctions, and many sawmills will be forced to switch a higher proportion of their production to pine. Estimates speak of a ratio of 70% redwood to 30% whitewood.
Mills with access to independent log reserves will still be able to maintain whitewood production, but general log shortages are likely to create competition amongst sawmillers, forcing spruce log prices upwards.
Redwood from the Baltic region is, with few exceptions, more knotty than whitewood, and past experience has shown that its other characteristics, including slope of grain, bark pockets and the speed of discolouration, have made it less desirable.
Carcassing material
For the mainstream product of dry-graded C16/24 carcassing, whitewood is strongly preferred by importers and end users alike. But for general use, and in particular where goods are required pre-treated, redwood is acceptable for many applications such as fencing and packaging material.
There is a limited production of selected high quality redwood exported from Latvia that competes with the Nordic productions of unsorted, fifth and sixth grades, but it is confined to the most sophisticated shippers with very tight bracking.
In spite of an improving price level for carcassing and general sawn timber, offers from Baltic shippers to the UK have been limited because so many players disappeared from the market. Producers that are still able to export are working from reduced production, and report better returns from other markets such as north Africa.
Mothballed machinery
Sources on the ground in Latvia speak of mothballed machinery lying idle, or in some cases entire production units that have been ripped out and moved across the border into Russia, to cut for the Russian domestic market. Other mills have simply closed permanently or converted their premises to other products or warehousing facilities.
There is a perception in the trade that the Baltic states may be a spent force, with raw material unlikely to match the needs of the sawmills, and financial institutions giving the industry a wide berth on the matter of investment (with a few notable exceptions).
One contact felt that “the cake had been eaten, the bakery shut and nobody could afford the ingredients”.
Others reflecting on the future of the Baltic trade reached an almost common consensus that the resilience of the region never ceased to amaze, and solutions could be pulled out of a hat at the last moment. The Baltics will always be a space to watch and there are few alternatives flexible enough to replace them.
Baltic traders have certainly weathered many storms, but whether they can, or would want to produce for a market that swings from feast to famine so quickly under current conditions is another question.
