Better weather is teasing out growth in demand around the UK, and business is steadily improving for importers and merchants alike. But as demand has strengthened, gaps in imported softwood specifications have started appearing both in merchants’ yards and at the quayside.
Replacements from exporters have been hampered by a combination of holiday closures across the Nordic countries and fibre shortages in the Baltic region. In Latvia, a shortage of sawlogs has forced some mills to under-ship volumes against contracts, resulting in certain key lengths becoming sold out from shippers’ inventories and impacting UK landed stocks.
Cutbacks in logging from state forests throughout the year have caused Latvian logs to be in short supply and prices to remain high. In turn, this has forced mills to increase selling prices to all markets including the UK, which has so far been the slowest to accept them. In 2012, Latvia’s State forests (LVM) sold 12% less volume than the previous year, but actual earnings were higher due to better prices and improved efficiency. Heavy snow damaged Latvian woodlands in December, forcing the removal of 200,000m³ of mixed species, but in a move to expand forests under its management, LVM invested over €2m in new acquisitions from the private sector, gaining just under another 1,500ha.
As replacement costs of softwood have started rising in the UK, the gap between imported and home-grown supplies has widened, adding a general drag factor to market prices. Prices have also been held back by the move by some importers to live off earlier landed stock accumulations and maintain first quarter selling levels to try to retain market share. This has been due to poor demand which carried right through to May. Some importers suffering a severe lack of orders even deferred shipments from May and June back to July and August
Prices to rise
There is a common agreement in the trade that when the backlogs of UK stocks are absorbed into the market there will be a noticeable jump in selling levels as higher-priced cargoes begin to arrive. To date, very few importers have reflected replacement costs in their selling levels and, although market share is one factor, another is the strength of resistance from customers, leaving them no idea where they should pitch prices. Competition has been based on price alone, but now that shortages are developing, availability and specification are also becoming important factors.
At export mills, the log shortages and high fibre costs have created a background of uncertainty. In some cases, the situation has persuaded some mills to withdraw from selling on the forward market and wait on the sidelines, while others have agreed limited contracts through to December. As one shipper described the situation: "If you pay the right price you can get what you need, but mills will not sell willingly to cheap buyers." Some importers have yet to catch up with current selling levels, and they are likely to despair at further increases from September.
In Sweden, the picture is similar to that in the Baltic states, as sawlogs needed by independent mills are in short supply and prices are high. The industry is currently on holiday and production has ceased until the second week in August, but some producers are holding back for longer in the expectation of a rise in the market price. A lot of volume was sold to all markets before the July closures began, leaving inventories at very low levels.
Currency issues
For UK buyers of Swedish softwood, currency is a big issue as the krona (SKr) has continued to strengthen against sterling. The pound rose in June to reach over £1/SKr10.38, giving purchases a temporary boost only to fall again in July to below SKr10. This represents a drop in sterling of almost 4%, which directly increases the cost of prices to the UK by the same value. The volatility in currency exchange rates is nothing new to a trade that has witnessed significant swings over the years, creating a game of roulette in companies’ buying cycles. A day either side of an exchange movement can make a significant difference to an importer’s profitability. In the case of carcassing, the current trend favours British production over imported.
In the joinery market, UK prices have remained both firm and stable. There is a strong demand for good quality whitewood, a market that has grown in the face of a downturn in the availability of Russian redwood over the last few years.
Asian markets are paying significantly higher prices for redwood than the UK or Continental Europe. In the first four months of this year, Swedish softwood exports to Europe fell by almost 11% against the same period in 2012, with a heavier drop of just under 15% in redwood alone. Redwood exports in the same period rose by more than 18% to Japan, while trade with China expanded by almost 9%.
Britain is still the largest importer of Swedish softwood at over double the volume of the second largest, Germany, but it is the growing combination of increases to other markets that threatens supply more than any other factor.
The upturn in the US construction sector has also added demand for Swedish softwood, with a growth in exports rising in triple percentage digits. In the US a 6.8% rise in housing starts was recorded in May and, although the annual build is still well below peak rates, the industry is already experiencing shortages of framing lumber and panel products, especially OSB.
There are fears that shortages could actually constrain recovery in the housing sector, where there is an underlying demand. Shortages have also pushed up prices by an average of 10% over the first six months of this year. It is more than a possibility that a surge in growth of US demand will suck in a significant volume of offshore fibre, and will open up a wider market for suppliers currently servicing the UK.
Nordic softwood production has been steadily reducing against last year’s figures, by 2% on a rolling 12-monthly basis, and by 3% in May alone. This has confirmed the mills’ determination to keep a grip on supply, but it has also been a result of a decline in the availability of sawlogs.
If demand in the UK and mainland Europe were to strengthen suddenly, then shortages of imported softwood would become accentuated. Certainly engineered wood products such as I-beams would help alleviate problems in the construction sector, but for those using solid wood, shortages would become inevitable.
Taking current year-to-date trends into consideration, there is little to persuade British traders that an upturn in demand is anywhere in sight. The market has only just picked up after an extended winter and it will take months to claw back turnover lost to the weather, particularly in the fencing and landscaping markets.
However, as with the US market, there is an underlying demand for housing and construction, and when this kicks in, supply will become the most important factor the industry will have to deal with.
