As previously reported by TTJ’s softwood specialist, the big story in the Baltics region is the impact that a protracted spell of extremely wet weather has had on harvesting in the region and the subsequent shortage of logs.
What raw material is getting to Baltic sawmills is being processed immediately, so processors don’t have a cushion of stock in the log yard to fall back on. Neither do they have the luxury of sourcing logs from further afield because neighbouring countries’ forestry operations have been similarly awash.
A ban on the export of unprocessed logs from Belarus has made the headache worse. “The sawmills were getting quite a lot of logs from Belarus in 2016 but last year that stopped completely,” said a UK-based agent.
“Customers are used to hearing about the lack of logs and they don’t really believe it any more but last year’s summer and autumn were very wet in the Baltics and in south Sweden and south Finland and the whole area has a massive shortage of logs at the moment,” said a major sawmiller. “Sawmills have run out.”
In fact, if customers needed any further persuasion, an announcement in the last few days of December by the Latvian government’s Crisis Management Council that it was declaring a “disaster situation” in the logging sector should convince them of the scale of the problem.
Latvian forest authorities have officially closed flooded forest access roads, bringing logging almost completely to a halt. A contact said he had heard that Estonia was to take similar action.
Latvia’s agriculture minister Janis Duklavs said the disaster situation only applied to the logging sector, not the entire forestry industry, and was being instigated to protect logging companies against sanctions for non-performance as a result of the floods.
A contact said that he had heard that forest owners in neighbouring Lithuania estimated they had lost €50-60m through being unable to fulfill contracts.
Andrejs Cunskis, president of the Latvian Logging Association, which is one of several organisations that had turned to the government for help, said that the situation had not improved since a state of emergency had been declared in Latvia’s agriculture sector for the same reason.
By mid-January the temperature had finally dropped below zero Celsius and the hope was that the freeze would firm up forest access roads to enable logging activity to return to normal.
“It means log flow from the forests should improve but with virtually no imported logs available from Russia or Belarus it is hot competition for Latvian and Lithuanian logs from the [Latvian] sawmills, who are trying to build their spring inventories,” said a spokesperson for a major sawmiller. “This is driving up log prices, which in turn will drive up sales prices in all markets.”
And, as one sawmiller said, any respite on log availability could be short lived.
“The water hasn’t gone anywhere, so when the spring comes and the frost thaws, the water will be there again,” he said. “We will have a very difficult raw material situation in the first half of this year.”
Another major processor added that the availability of different species had also skewed.
“In Latvia the log supply is predominantly 50:50 spruce and pine but there is better availability of the pine,” he said. “It depends what you want to cut from it but for longer lengths, straighter lengths and decking the material is always more difficult to find.” He added that he thought the supply of pallet wood from the Baltics had dried up “some time ago” and that UK producers had benefited as a result.
“Everything [in Latvia] has been sold and everything has been cut into boards so the pallet wood sector is really quite tight, as is some fencing material.”
For those mills looking to export to destinations such as the US, the main effort was to produce high quality kiln dried material and/or decking products, he said. Tight log supply and price increases have gone hand-in-hand as usual and, in mid-January, were sitting at around €80/m3, which is a double-digit percentage increase on January 2017.
“Depending on the region, log prices increased anywhere between 5-15% last year and we will see further increases coming now, for sure,” said a sawmiller.
He said his mill had elected not to pay more for logs because that wouldn’t change the wider picture. “You can pay €5 more but you still won’t get the logs, so we are firmer on the pricing and reduce production hours if we have to.
“I have heard of mills that have had to shut down completely but we are not in that situation. We may have to take a few hours of production out though, and we are also selling very short at the moment because we don’t know where this is heading.”
At the time of writing, one UK importer said that tightening log supply hadn’t caused his company any problems to date but that he was aware of the issue.
“A couple of the smaller shippers we deal with had contracts on for January but nothing had been firmed up for February onwards, so I think that indicates they didn’t want to commit because they weren’t sure what the log prices were going to be like – or even if logs were going to be available,” he said.
Sawn timber prices have also risen, pushed up by a triple whammy of exchange rates, the aforementioned raw material costs and, in some regions, rising labour costs. Salaries are said to have increased by up to 10% in Latvia and 7-9% in Estonia.
Volume-wise, softwood exports from the Baltic states were projected to reach 4.45 million m3 in total in 2017 with Latvia being the largest exporter, at 2.55 million m3 between January and November that year.
According to Latvian Wood, the country exported 907,700m3 of softwood to the UK during that period, down from 950,500m3 in the same period of 2016.
“Prices went up all year but in real terms it is still a price cut for mills,” said an agent. One major sawmiller said sawn timber prices had risen by £9/m3 in the last six months and predicted further hikes, although by how much “would be driven between demand and exchange rates”.
A UK agent said he envisaged sawn prices rising by up to €10/m3.
Currency is going to be an increasingly important factor in 2018 said one importer, but he added that prices would probably be driven by market forces.
“Other markets [outside the UK] are busier and they are consuming wood, so I think that is going to put pressure on the selling price,” he said. “If I had to take an educated guess I would say it could increase by another 10-15%.
“It will be affected by what the Swedes do,” he added. “The Latvians are not far behind the Swedes on price now. Whereas years ago the rule of thumb was that they were always £10-15/m3 behind the Swedish price, they’ve got wise to the fact that most of the fibre is exactly the same. I would say the Latvians are currently £5-8/m3 behind the Swedes, so not a vast difference.”
A Latvian sawmiller said his company had seen the average selling price rise by about €15/m3 over 2017 and predicted an increase “in excess of 10%” from April.
“Price movement will continue and will draw out the market,” he said, adding his voice to other contacts’ comments that Swedish prices will be key.
“It very much depends on what the Scandinavians do in terms of whether their efforts are based on increasing prices or on moving to other markets,” he said.
As mentioned, the UK timber trade isn’t the only market in town for Baltic producers and there is healthy business to be had elsewhere.
“Continental Europe has been very busy,” said an agent. “It picked up in France and the Netherlands and now we’re hearing about Germany. Germany hasn’t built much since 2008, but now there is investment going into renovations and new housing. There is a whole new generation of people coming into the property market there, plus they have to house the immigrant and refugee population.”
He added that prices in euros had been quite stable but that they were starting to creep up.
Opinions vary on whether Baltic producers will stick with the UK market or switch focus to other, perhaps more lucrative, destinations.
One major sawmiller brought between 250,000-300,000m3 of its circa 1.1 million m3 softwood output into the UK in 2017 but said that while production will likely increase, the UK’s share will probably decrease this year “due to higher paying markets taking more of the production” and “UK market uncertainty”, largely created by Brexit.
“Other markets pay a higher price and are all busy,” he said. “It will tighten supply [to the UK].”
Another Latvian processing giant said that significant investments in the sawmill in the last two years had boosted its output by around a third. It increased its exports to the UK by about 12% last year over 2016, but said that it was really targeting this extra capacity at markets outside the UK.
“Brexit has had an effect on our appetite to export to the UK,” the spokesman said. “We have kept our existing customer bases happy but we are moving to other markets, specifically to the US and China. We are exporting as far afield as Japan and Korea and I see that continuing to grow. I don’t see us increasing capacity to the UK anymore now – if anything I think we’ll be restricting supply.”
Meanwhile, another significant forest products group in the region said that while it was selling to other destinations from all its operations, it hadn’t “actively” started looking for alternatives to the UK market. Its exports to the UK increased slightly last year but are predicted to remain at the same level this year.
“Brexit has brought uncertainty and some grey hairs because of the volatility of the pound, but hasn’t impacted our UK volumes yet – but then Brexit hasn’t actually happened yet,” said a spokesperson.
“We just go day-to-day and see how the situation evolves, but we are not actively looking for substitution of the UK market. Sweden has been actively developing its sales to North America and that has taken some of the UK’s volumes but there is no major export from the Baltics to North America, only some bits and pieces.
“It’s the same situation with China,” he continued. “China has been the greatest opportunity but it is also the greatest risk. Exports of sawn and planed timber from the Baltics to China are quite small and it is mostly going from Sweden, Finland and Germany, so if demand from China were to drop, the Baltics would not be directly impacted, but indirectly, definitely. If something happens there, it will affect the whole trade.”
A UK-based agent added that “everyone understands that, whether the UK is inside or outside the EU, they will need timber”.
“There will be a period of readjustment if there are any customs procedures and currency volatility will be the biggest issue, but everyone understands that the UK market is a long-term venture, even if Brexit turns things around in a way that it is not the most lucrative market.
“It’s the same for Swedish mills,” he added. “They can talk as much as they like about how good prices are in America but they will never leave the UK. They will keep volumes here because it is a reliable and stable market.”
However, with demand good from nearly all markets – “Japan is quiet, the US is relentless” – one major supplier forecast that 2018 would be “more of the same”.
“It will be supply-driven,” he said.
“Importers and merchants will need their friends.”
