Summary
• A March upturn seems to have carried into April.
• The weakness of sterling has put pressure on shippers wishing to sell to the UK.
• The Swedes have won business from Finnish, Russian and Baltic producers.
• Landed redwood stocks in the UK have been turning over well.
• The whitewood market is still suffering from a lack of demand for carcassing.
• The Canadian softwood industry is in a serious condition.
In spite of overwhelming economic uncertainties, many timber merchants and importers reported an unexpected improvement in their March trading figures. This followed both a bleak January and February when demand failed to materialise, causing mounting concern that sales in the UK might not pick up at all in the first half.
Whether this upturn in March was just an isolated event remains to be seen, but several traders have confirmed that the momentum has carried forward into April and is giving rise to some optimism.
House building is at an all time low, but the repairs and renewals market has kept many of the smaller general merchants going, and municipal and commercial contracts have helped the larger and more specialised importers in products such as cladding and laminated beams.
Although softwood demand remains weak by normal standards, importers acknowledge that supply is not an endless stream as exporters have been taking measures to avoid overstocking.
Curtailments and production cuts by the sawmills are now filtering through to the supply chain and creating gaps in specifications, particularly in redwood.
As one importer described the situation, “last year it was fairly easy to get most grades and sizes in joinery redwood at short notice, but now mills are tending to offer alternatives because they can’t match buyers’ requirements”.
The weakness of sterling has put great pressure on shippers selling to the UK in either dollar currencies or euros. This is because demand has been so weak and buyers have not been prepared to accept price increases as the pound has dropped.
Also, volumes of landed stock have until recently been too high, and traders have been offering cheap prices to convert stocks into cash. This has created a price level well below replacement values, and left little to no incentive for buyers to place business on the forward market directly with shippers.
Swedes win business
With the krona at a more favourable level against the pound, the Swedes have been able to attract business away from the Finns, Russians and Baltic producers, although levels have not been high enough to make the return they would like. One exporter commented that nearly all contracts shipped at UK first quarter market levels have lost money, and mills were looking to other markets for the second quarter.
All shippers are of the opinion that UK forward prices must increase, at least in line with currency exchange rates (if not by more), before they are willing take on new business. Their thinking is spurred on by better margins in other markets, and demand from North Africa, Asia and the Middle East.
Buyers from these countries are actively visiting their suppliers to discuss requirements and secure their specifications.
In the redwood market, landed stocks in the UK have been turning over well in the past six weeks, and as some specifications have become scarce, importers and merchants have shown a willingness to take larger sizes and cut them down at their own re-conversion mills. Stocks of Russian softwood reduced significantly during this time, as terminal operators sought to reduce cargoes over the winter and bring stock levels in line with demand.
“’Last year it was fairly easy to get most grades and sizes in joinery redwood at short notice, but now mills are tending to offer alternatives because they can’t match buyers’ requirements’” |
Cutbacks at sawmills in the north-west region of Russia have left little volume available for shipment, and only those importers prepared to pay premium prices are likely to receive shipments from Archangel in the second quarter. As other markets such as Iran and Egypt have started to improve, Russian mills that are still in production will undoubtedly adopt a more bullish stance over pricing.
Nordic joinery stocks have also been selling well since the beginning of March, and volumes that accumulated on the quayside during the latter part of 2008 have been clearing into the marketplace steadily. Replacement volumes can still be bought from Swedish sources at relatively competitive levels, but these offers are likely to close off by the end of April as the Continental markets are now paying some €15/m³ more than the UK.
Demand for timber decking has improved over last year, with some importers recording significantly higher levels of sales. Contained within those figures lies an element of re-stocking taking place amongst the smaller merchants and garden centre sales outlets for the Easter holiday, and it is yet to be seen whether or not there has been an upward trend in demand from consumers.
The whitewood market is still under pressure as the supply of carcassing is still exceeding current demand. This is in spite of the fact that many shippers have now withdrawn volumes from the market.
Baltic producers have reduced output in the basic dry-graded quality, and turned to other products such as laminated softwood. Those mills maintaining full production have benefited from improved log supplies, together with a reduction in fibre costs of around 45% from the peaks of late 2007, and this is helping to offset the negative effects on exports of a strong lat and euro.
Germans cut back shifts
There has also been a reduction from the large German exporters who flooded the markets this time last year, but have now cut back their shifts. Specialised German producers of large sizes and long lengths, on the other hand, are enjoying steady demand and the log supply has eased considerably.
Finnish sawmills have very little whitewood material for export, as there have been substantial production cuts across the whole industry. Furthermore, a lack of demand for sawmill residues from the pulp industry is likely to last for the greater part of this year and that will further hamper operations even if demand for sawn products improves.
There is little chance that Canadian shippers will consider cutting for the UK market due to sterling’s weakness, and the logistical problems associated with chartering smaller cargo vessels in line with British buyers’ volumes.
Canadian mills are currently focused on the implications of the unresolved dispute between the US and Canada over duties. A recent arbitration made in the English courts found in favour of the US to pursue punitive amounts of US$68m against Canadian mills in four central (eastern) states, which include Quebec and Ontario. This is because the US claimed that the Canadian mills were in breach of the 2006 lumber agreement, and effectively received a government subsidy on logs from state forests. In order to pay the damages, the mills will start paying a 10% tax on exports to the US from April 15.
This could cause some mills to cease trading, hitting the industry with a further blow after the huge round of curtailments and closures caused by the global recession. There are further anxieties in BC and Alberta that the US sawmillers will try to target these states also, and make claims against the mills for breaches of the agreement through government support schemes. Exports from Canada to the US dropped by almost 45% in 2008 and the industry is in a serious condition.
With such potential shortages and problems in the background, it could be argued that the Swedes will dominate the UK supply for the rest of 2009. However, there is still the question of price, and in spite of the krona’s lower value giving a competitive edge, the mills want better core prices to keep producing. Certainly the larger whitewood mills will continue to rely on volume to control unit costs, but the medium-sized enterprises are likely to focus only on the markets where returns are higher.
In spite of these factors, whitewood supply is still perceived to be in excess by UK buyers, and competition amongst UK importers from landed stock is still fierce with prices at rock bottom levels.
The most probable scenario for the foreseeable future is a sharp rise in redwood prices by around £10-15/m³ in the next month, and a slow and erratic firming in the whitewood sector by €7-10/m³ over the next eight weeks. All subject to currency, of course.