According to an article in The Irish Times on February 27, the majority of the country’s population believes that Ireland’s economy won’t be too badly affected by Brexit.
A Eurobarometer poll carried out last November revealed that only 13% think the economy will worsen, 45% think it will stay the same and 38% predict it will actually improve.
That 38% will not include those companies at the sharp end of exporting – particularly in the agricultural sector – where the tumbling value of Sterling following the EU Referendum resulted in some early casualties.
As an example, Irish mushroom farmers rely on the UK for 80% of their sales and by October last year Reuters was reporting that five of the 60 farms had gone out of business. The UK accounts for almost half of all Irish boneless beef exports and nearly 60% of some cheese products, so these sectors also stand to lose.
This type of news demonstrates the impact external events are having on an otherwise healthy Irish economy, where unemployment is decreasing and growth is continuing, albeit at a slower pace.
“The economic statistics coming out of Ireland at the moment are positive,” said a major sawmiller. “Unemployment has fallen to 6.6% from 15.1% in 2012, personal consumption rose by 3% in 2016, and consumer confidence reached a 15-year high. GDP rose by 5.2% in 2016 making Ireland the fastest-growing European economy.”
However, he added, the relative good times on the domestic front have yet to filter through to the timber sector.
“It hasn’t flowed through to housing starts and there is no great traction in the housing sector in Ireland yet,” he said.
Some sawmills have tried to direct volume towards the domestic market and the housebuilding sector but as the latter is recovering from a very low base this is not proving to be particularly lucrative.
“Last year 11,000 units were built and there is a need for 20,000. To enable that increase there are measures that need to be taken by government and banks and possibly the political climate at the moment has slowed that down,” said a contact.
“It is probably going to take two years before the government finally gets housing back on track,” said another contact. “There are signs that this year could be the start of it.”
Indeed, one construction company, Cairn Homes, which is building around 100 homes a year, has announced it will sell approximately 1,500 houses by 2019.
“Rapid growth is coming but is taking time to get through planning,” said a contact.
“Construction is still pretty flat in Ireland but the potential to increase is strong.”
He added that the skills shortage created by the recession was slowing construction still further but that the government was determined to push housebuilding and infrastructure development.
“One of the results of Brexit is that financial institutions have been looking to relocate some of their functions from London to Ireland and they’re saying we don’t have enough houses for them to move their people here. So the Irish government is keen to show that we have that infrastructure here.”
Even if demand from housebuilding does increase significantly the opinion is that it won’t have the scale to take the volume of timber mills are now capable of producing following years of capital investment.
“We need to be able to supply C16 into the UK within a certain time frame at a certain price and to build the customer base there,” said an Enterprise Ireland (EI) spokesperson.
“That will be done through sales and marketing intelligence.”
So, Ireland’s timber producers remain focused on exports and the UK remains “the most important and logical market for the Irish sawmilling industry”. According to the Timber Trade Federation’s monthly statistics, from January to November 2016 imports of Irish timber rose by 9%, helping the country maintain its 6% share of the UK’s total volume of softwood imports.
The hope is that this can be increased to 8% over the next five years but this will depend on efficiencies along the length of the supply chain, from forest to delivery to the end user and on “a portfolio approach”.
There is certainly an element of “business as usual” in exporting timber to the UK with one major sawmill contact going so far as to say, “there is very little discussion about it [Brexit]. It will come up in passing but the concerns that were there six months ago have definitely dissipated”.
For many others, however, Brexit is still the biggest issue facing them and the dependence on trade with the UK has prompted research into the likely impact as the actual negotiations get under way now that Article 50 has been triggered.
“We have been engaged with our own customers and EI in a Brexit forum to consider the consequences and have carried out research on World Trade Organisation (WTO) levies,” said a Coillte spokesperson, adding that levies for Ireland could be “absolutely crippling”, particularly for the agricultural sector where tariffs of up to 70% could apply.
“This is going to be a whole new world that none of us knows about,” said EI’s spokesperson. “Unless you were around 40 years ago and had customs and tariffs, you don’t know how it works. The purpose of the Brexit forum is to talk about some of the challenges and to prepare for different scenarios.”
The positive news is that if there is a hard Brexit with no trade deal and it’s the WTO rules that are implemented, sawn timber products are currently tariff free.
Tariffs would apply on panel products, which would affect Coillte’s SmartPly OSB and Medite MDF exports and these are currently reported to be 7%.
The challenge there, according to EI’s spokesperson, is that half of Ireland’s wood fibre exports go through the board mills. “If there are tariffs or future shocks they [the board mills] really have to be into scenario planning. They have to be hyper efficient within their own four walls but it’s all about sales and marketing and what the customer wants.”
The other post-Brexit risk causing consternation is the movement of logs through border controls in the future. “We’re more committed to the UK than ever so we need to make sure our trucks aren’t held up at borders,” said a commentator.
“We need to ensure there is minimal disruption on borders,” said another. “Our product is bulky value commodity items and anything that delays border crossings will impact transportation costs, which will obviously affect our competitiveness.
“We are unique in that we share a border [with the UK], north and south, and the thought of going back to an economic border, bearing in mind all the progress that has been made in Irish/British relations would really be a backward step,” he added.
“We have to make sure that the Irish government is able to hold a dominant position in the Brexit negotiations because we have the most to lose,” he said. Of course, the impact so far has already been significant.
“It has had a huge effect on us,” said a sawmiller. “We export 60% of our production to the UK and have valued customers over there. On average €800 is gone from each load going to the UK. We have completely carried the cost of the fall in the value of the pound.”
“We have had to take it on the chin,” agreed another contact, adding that the price increases the Irish timber sector was predicting at the time of the last report had come in very slowly and at a much lower level.
“Prices were already at an almost historical low but if all the mills had got an increase of £10-15/m3 after Christmas they would have been happy – but they didn’t.” Instead, he added, price increases on fencing timber had been “in twos and fives”.
“We got £5 but we need another £10 to survive,” said another contact. “This will all be down to supply and demand. We are price takers, not price makers. Our customers in the UK have to be given competitive prices for their survival.”
“We negotiated price increases into Q1 and Q2 but has that compensated for the 15% drop in currency? The answer is no,” said a major sawmiller.
Mills are now looking at further price increases in Q2 to enable them to claw back some of the margin.
“As we’ve got into spring there is a big momentum towards significant price increases in Q2,” said a contact. “That will be across the board and for carcassing timber will be in the order of £10-15/m3.”
He added that these price increases have been led by Scandinavian suppliers charging more for their sawn timber.
“It has given confidence to the homegrown suppliers [including Ireland] to shorten the gap that was created in the second half of last year when the differential between Scandinavian and home-grown went up to more than £40/m3. I have to say we’ve got plenty of work to make sure we achieve our price increases but the fundamental thing is that if demand remains the way it is, there is a very good year ahead for timber.”
Demand from the UK has been good from the start of the year, again, across the spread of products and some mills have been on overtime since early January. The mild winter was a bonus, helping production run as normal close to Christmas and the traditionally quiet January started “at the same tempo”.
One sawmiller said that production was at full capacity and “had never dipped”, while another reported a good January, a slower February and a good March – the latter thanks to Storm Doris. He said he’s expecting another fillip in April with Easter and better weather.
“A late Easter always helps the market and I’m confident now for the next three or four months,” he said.
“I think maybe in the second half of last year people held back on purchases to see what would happen [with Brexit] and eventually they got over that,” said another major sawmiller. “What has happened now is that there is very little stock in yards or on quays.”
In fact the same contact went on to warn the UK construction market that if current levels of demand continued, there could be a shortage of home-grown [British and Irish] supply in May or June.
“It’s something I think our customers are becoming more aware of and they are really blocking in with their current supply and getting commitments and guarantees in place for the middle part of the year.”
Log availability has increased but so has production capacity and demand, so while the raw material is there, it is tight and some mills are bringing logs in from Scotland to supplement domestic supply.
“There is still more demand than supply in Ireland,” said a contact. “There is still overcapacity in the sector – that feature hasn’t gone away.”
The timber sales system Coillte introduced in 2015 has certainly provided more security, both in terms of supply and in price.
Coillte supplied a record volume of sawlogs from its forests last year – 1.68 million m3, which was a whopping 22% increase on 2015. Volumes this year are already up 10%, although this rate of increase could not be sustained without an injection of timber supply from the private sector. Coillte is expecting its own output to be 1.75 million m3 this year.
Even though Coillte’s volumes are up, the speed at which the mills are working their way through it is causing tightness on demand for both construction grade roundwood and small sawlogs.
“All the customers are hungry on all sides and we’re not seeing any stockbuilding on any products,” said a Coillte spokesperson.
“Obviously we are one step removed, but what we can see is the raw material going onto the market – and there is good demand for all of it.
“Even though we will be up nearly 30% in volume terms compared to where we were in 2015 I don’t think they have enough [raw material],” he added. “You would think with all that extra volume there would be more but a lot of the mills have made capital investments in operating efficiencies and they are able to use more.”
Coillte’s spokesperson said that mills are already set up for the additional log supply expected to come from private growers, including farmers, from 2020. He said that forestry investment specialists such as Dasos Capital and Euroforest were investing in “consolidating” the private timber growers’ sector, as is Coillte, which is launching its Premium Forest Partners Scheme this month [April].
This scheme will see Coillte managing a farmer’s plantation and tree harvesting and giving him a share of the profit from it. Coillte will then replant the site and hand it back to the farmer.
“The benefits for the farmer are that he gets a guaranteed income and doesn’t have to worry about managing the forest plantation, deciding whether to hold or release it depending on whether the prices are low or high,” said Coillte’s spokesperson. “We can balance that out across our full estate, so the sawmills will have more certainty of supply.”
Meanwhile, Coillte continues to invest in its own forest assets. A €90m loan from the European Investment Bank will be used to finance the cost of planting, forest management and forest road construction and maintenance by Coillte over the next four years. Under the new investment, more than 35,000ha will be replanted and more than 1,600km of forest roads will be constructed and upgraded.
