The Irish timber sector’s attitude towards the UK’s vote to leave the EU six months ago could be summed up by the epigram “plus ça change, plus c’est la même chose” – roughly translated as “the more things change, the more they stay the same”.

There’s no doubt the Brexit vote has shocked and concerned Ireland’s timber processors – horrified some, in fact – but they are hanging on to their conviction that the fundamentals of trade between the two nations remain unchanged. In other words, the UK will continue to have a requirement to import timber and Irish mills will continue to supply it. It’s almost a case of business as usual, although with some fairly hefty caveats in relation to prices and currency issues.

One reason for maintaining and increasing sawn timber exports to the UK is that the domestic economy, while recovering, is still some way off providing sufficient and sustainable markets for Irish timber. And the Brexit vote has dented growth forecasts.

In our Ireland market report in February this year, TTJ reported that Ireland was the fastest-growing economy of the Eurozone. But, while growth forecasts are still the envy of many EU member states, they were downgraded by the Department of Finance ahead of the October 11 Budget. The government now sees GDP growing 4.2% this year, down from the 4.9% forecast in the summer. It also cut its 2017 projections from 3.9% to 3.5%. It cites risks associated with Brexit and “a more uncertain global outlook” as the cause.

The Budget was flagged up as “Brexitproofed”, with the Irish Times quoting Taoiseach Enda Kenny saying this was “to support in a tangible way Irish firms exporting to the UK”. He has acknowledged that 200,000 jobs are dependent on access to British markets and said that every government minister, department and agency is treating Brexit as top priority.

The Department of Finance has already published a paper called “Getting Ireland Brexit Ready”, which looks at the economic implications and responses to the UK’s EU withdrawal. Government agency Enterprise Ireland also published guidance – “Exporting to the UK? A new guide for Irish businesses post UK Referendum”.

On the domestic front, Budget pledges include a help-to-buy scheme for first time buyers, with a 5% PAYE rebate of up to €20,000 over four years on new homes worth up to €400,000. Meanwhile, the Home Renovation Incentive Scheme is being extended by two years to the end of 2018. Some €1.2bn has been committed to support the Housing Action Plan next year, aiming to deliver 47,000 social housing units by 2021.

The target for new build housing in Ireland is around 25,000 per year – a far cry from the crazy heights of 2006/07 when starts exceeded 90,000, but also a long way from the 12,000 or so currently being built. The housing shortage is “a massive problem”, said one sawmiller. “When we get up to 25,000 it will require a substantial volume of timber, but it’s not going to happen overnight.”

“The bulk of the growth [in house starts] is going to be concentrated on the larger urban areas – Dublin, Galway, Cork and Limerick,” said another sawmiller. “In general it is positive, but it is not at a level that is going to change the dynamic of what the Irish industry is going to have to do. We’re going to have to continue with three-quarters of our timber going to the UK.”

According to one TTJ contact, Brexit has been “the only topic of conversation” in his dealings with Ireland’s sawmills. “I think everyone knows that we will be there [in the UK market] in the long term, but it’s a question of how we get through this shortterm volatility? How do we make sure they understand we want to keep doing business in the UK and that Brexit doesn’t mean Ireland is exiting?”

There are some worries about the UK’s economic growth prospects and question marks over its ability to attract investment, which will have a knock-on effect on Irish exports, but most concern has been centred on the impact of sterling’s plummet against the euro. Exchange rates are having a profound effect and price rises are looming. “In a nutshell, any discounts that might have been given as winter deals from Irish mills aren’t happening now because Brexit effectively is the winter deal,” said one sawmiller, adding that fencing mills were already 17% down on turnover thanks to currency.

“Mills are taking it on the chin at the moment but I would say the first quarter of 2017 could see pretty high price increases.” Another major sawmiller thinks increases may not happen until the second quarter but agrees they will be substantial. “Purely on currency terms the price needs to be €20/ m3 higher. And there is a huge gap between imported and home-grown at the moment, so there is every opportunity for prices to harden.”

“We have an FX hedging policy but come January/February next year the currency now is going to be the norm,” said another contact. “Yes, we are taking a bit of a bashing but we are dealing with a commodity and in a market space where there is a requirement to import timber, so I’m optimistic prices will shift in the right direction. It won’t be bonanza time [for mills] but prices will adjust to the costs.” FX pressure is likely to work hand-in-hand with sawn timber shortages in certain areas, suggested one contact.

“Because of the currency situation the Swedes and Russians have already put up carcassing prices and there’s been a big rush to British and Irish supply,” he said. If mills are flat out on carcassing and haven’t switched to fencing yet, he said, fencing stocks are “probably low” for the time of year. “There aren’t many production days left before Christmas and if any bad weather comes in January the timber may not be there.” Another contact suggested an additional effect of the weaker pound could be the increased attractiveness of Scottish logs to overseas buyers. “If I was a British sawmiller I would be worried about buyers from Eurozone countries coming in and mopping everything up,” he said.

Log sales advance

On the Irish log supply front there is widespread approval of the timber sales system Coillte introduced last year. One major sawmiller said it mitigated against any risk with the UK market post-Brexit.

Coillte continues to sell timber via monthly blind auctions, but also has an annual contract event (in October), at which mills can secure up to 50% of log allocation for the following year. Log prices are dependent on what is happening with the FX rate and what is happening with market prices. As the FX weakens, log prices automatically fall, which is of obvious benefit to the sawmills, though not so great for Coillte.

“There have been one or two price increases over the last month which have slightly compensated but this month [October] FX has worsened again and that has driven our annual contract prices down,” said a Coillte spokesperson. “Overall, however, when it comes to the auctions our prices are pretty steady and in the last auction they actually went up.” “It’s given us 50% of our volume up front for the first time and that’s given us security of supply which is passed on to customers,” said a major sawmiller. “Coillte has to be complimented for linking the system to the end market as it gives people a chance. They are obviously taking a hit on this, but for us security of supply and prices directly linked to the market are a huge mitigating factor for currency-associated risk.”

Another sawmiller said the new contract system was “exceptionally positive” but added there wasn’t an over-supply of raw material. “It’s delicately balanced at the moment, very nip-and-tuck. In Ireland there is still confidence building required as we’ve just come off the back of an awful lot more capacity than there was [log] supply.”

Irish Timber Targets Greater Role

Coillte’s spokesperson agreed that its customers could probably take an extra 100,000m3. “We’ve made a lot more material available but they are still hungry.

“Last year we sold 1.35 million m3 of large and small sawlogs and this year we are going to sell 1.6 million m3, so that’s a big jump for us. Brexit and currency aside it has been a very good year with more activity and more material movement. We’re looking to grow it again next year to 1.69 million m3 and our aim is 1.8 million m3 by 2020. Overall, Irish timber can really start to play an even bigger part in the market.”

Security of log supply is the lifeblood of sawmills and is a catalyst for investment in production technology.

GP Wood is the latest Irish mill to announce major capital investment as it embarks on a €14m project to upgrade its Enniskeane mill . Niall Grainger, managing director of GP Wood, said the investment had been in the pipeline for a couple of years as they waited for the timing to be right.

“Brexit did take the wind out of sales but the fundamentals are right – and more right now than ever because the volume of raw material in Ireland is growing. We’re going to be in a good position to process it.”

It’s an example of the resilience that has underpinned the Irish timber sector through the decades. Brexit may have caught them by surprise but “older heads” in the sector have been through tough times before.

“One thing you have to be impressed by is that they don’t go into Brexit saying the world is ending,” said a contact. “They’ve seen recessions and currency crises before and, while this is another challenge they will come through it better and stronger.”