Summary
• Many softwood traders are running their stocks down to the lowest levels for many years and some importers are offering prices below replacement cost.
• The RMI market is helping builders merchants but timber sales are generally poor.
• Competition and exchange rates mean selling prices in the UK have fallen by £20-30/m³ in the first quarter.
• Redwood prices have also weakened.

With a growing sense of unease, UK traders are wondering when demand will start to pick up following a disappointing Easter holiday plagued by poor weather. The decking and landscaping markets failed to respond to spring offers, leaving some merchants still trying to sell stocks acquired as far back as last September.

This situation, combined with a downturn in the housebuilding sector, has set a sombre mood among softwood traders. Many are keeping their purchases to the absolute minimum, and running their stocks down to the lowest operable levels seen for many years.

Recent restrictions placed on mortgage products have reduced the number of first-time buyers able to enter the housing market, resulting in fewer new home sales, and the collapse of many buying chains in the used housing sector.

The repairs and renewals market remains fairly buoyant, and many smaller builders are busy with extensions and refurbishments, particularly in the big towns and cities. This is helping builders merchants to tick over reasonably well, but timber sales alone are generally quite poor in comparison with other goods. Merchants in the south-east are expecting business to boom with the Olympic games in sight, and construction levels in the London area are already at a high level.

Stock levels high

But further up the supply chain and across the country, larger merchants and importers continue to suffer from high softwood stock levels. Furthermore, their stocks are being undermined by a continuous decline in the price of imports. This is being driven by over-production and a knock-on effect from problems in global markets, particularly in the US.

Only last week the US Congress was warned by Federal Reserve chairman Ben Bernanke that a recession is possible in the first half of this year, but it is planned that the government’s US$168bn stimulus and recent aggressive interest rate cuts will encourage economic growth in the second half and well into 2009.

In Continental Europe, demand has improved since the beginning of the year, but softwood stocks are still high and import prices dropped around €20/m³ during March. As with the UK, Continental importers have witnessed a higher volume being offered from German mills. As one agent described the situation: “If our customers will take a higher volume, the mills will agree to almost any level, particularly in the lower packaging grades and this is setting a price level before concluding any business.” Another confirmed there was a serious problem in the narrow 6th redwood market which had dropped by a further €10/m³, mainly due to oversupply. This situation has made the pallet and packaging market very unsteady in terms of price structures.

As sawmills have attempted to expand sales into new markets, so price structures have suffered to the point where it is difficult for any to make a profitable return. For those turning to the UK for business, sterling’s recent drop in value on the currency market has made sales even less profitable.

While selling prices in Britain have dropped by anything between £10-20/m³ due to competition, the pound has slipped by 7% against the euro since January (over 15% since January 2007), giving a combined effect of around minus £20-30/m³ in the first quarter of this year. This is from an already weakened level.

A combination of over-production and decreased demand has affected whitewood sales the most, affecting prices for planed regularised dry-graded carcassing in particular. Both Sweden and Germany are trying to offload these stocks at knockdown prices to markets that don’t need them, and by reducing price levels it has only exacerbated the situation for stockholders. Furthermore, as importers find themselves in a position to buy, they are now negotiating harder than ever to get average inventory costs down to the lowest levels possible in order to compete with other suppliers.

In the UK, competition among importers is fierce as they chase fewer orders, and some are offering prices to end users at levels below replacement cost, even at today’s low rates. This is all culminating from a total lack of confidence in shippers’ ability to control supply, and uncertainties over when the market will bottom out. There is a certain amount of panic and, in spite of reports from shippers and their representatives that prices could firm, importers are not turning any business away, regardless of price.

Redwood market

Difficulties in the whitewood market have influenced buyers’ attitudes towards redwood, and prices have weakened to some degree – mainly through poor demand. Redwood stocks at the sawmills have increased, but to levels far lower than whitewood. In fact, supplies of redwood sawlogs are fairly tight in many areas, and some producers in the north of Sweden have cut back on production to an extent that could cause shortages over the coming months.

Russian shippers have remained more bullish than other producers over price, and in some cases Russian redwood 4ths have come closer to Nordic 5ths on the forward market. Normally the Scandinavians command a premium in this market, particularly as Russian buyers have to commit to larger shipments and therefore expect a preferential rate, but in some cases 5ths are now available at cheaper prices for multiple trailer loads.

Landed stock levels of redwood in the UK are reported to be under control, with no unsold accumulations on the quaysides. There are some gaps in specifications but at present nothing is commanding a premium due to the paucity of demand. Traders are hopeful that prices will firm during the second quarter if supplies get tighter, but for the present, they are at least remaining stable.

Volumes of decking sizes sold in previous years are unlikely to be achieved during 2008, and it is anticipated that a higher proportion will be sold to domestic markets in northern Europe. Some traders believe that this market has passed its peak in the UK, and demand will lessen year by year, but for more upmarket projects using hardwood and pre-finished products it will remain firm.

Cladding

Industrial building and eco-developments have continued to buoy up cladding markets, with strong demand for larch, cedar and modified wood products. However, speciality suppliers have reported a general slowdown in most market sectors over recent weeks. Many projects already in the pipeline are expected to begin in the near future, helping to strengthen demand again.

Buyers do not believe that the softwood market has bottomed out, and remain ultra-cautious in their approach to every purchase. In many cases, enquiries are ending up with no business being concluded at all, even when negotiations might have lasted for weeks. This is causing frustration among shippers and their agents, and all but the most determined have started losing faith in the process.

Rising energy costs, and the reduction in the value of sterling, should be forcing UK importers and merchants to increase their prices and margins, not to reduce them. But they seem to be going in the opposite direction and seeking to build turnover and margins from reduced buying prices. This can only last until the true bottom of the market is reached, then the slow and painful climb upwards can begin, but it will be a mammoth task to restore price levels and profitability.