As the softwood trade enters the last month of Q3, prospects are being dampened by high stocks and patchy demand. Inventory levels by volume are currently high enough to last until the year end without the need for further imports, although at some point carcassing specifications will require balancing to avoid concentrations in some dimensions.
There is a strong market for pulp and paper products, which normally makes up around 75% of the trade, and with that volume of fibre comes sawlogs, which the larger Nordic forest product groups continue to process into solid softwood products.
While the global softwood market is on the back foot, Britain is regarded as a reasonable bet even though demand is low, which demonstrates how poorly some of the other markets are faring. The result of this thinking is for these companies to try to force more volume into the UK market than it can currently absorb. In the case of structural C16 and C24, companies are using severe price cuts as an inducement.
But the climate of crashing prices has only created uncertainty, and in many cases caused buyers to hold back on purchases until they believe levels have reached the lowest possible figure, unless there might be some sizes they urgently need as a top up. As prices descend, so stockists are also seeing the value of their inventory falling, with write-downs taking profit margins into negative figures.
As trading moved into September, some compensating news was appearing of intended production cuts for Q4 in Scandinavia, with initial estimates of a possible 200,000-300,000m3.
Sawlog costs in Sweden have risen but are still below those in the Baltic states, which to the industry’s surprise, rose again during week ending September 9. With strong financial results on the pulp side, some Swedish mills can afford to discount their sawn wood in a bid to keep throughput moving. Pulp sales for Q2 have been strong for Swedish producers, with one group recording a rise of 23% against the same period last year with sales at almost €837m. Given this advantage, they are in a better position to dominate the market over Baltic producers who are struggling to make a return in the carcassing sector, but Latvian pallet wood and pre-treated agricultural sections are trending at better levels than structural.
As sterling weakened in the first week of September by around 3% against the euro, it fluctuated by less than 2% against SEK, giving the Swedes another 1% advantage over the Baltic exporters.
In the agricultural and landscape market, a high volume of poles and posts were sourced from Belarus for many years, but since the EU belatedly, and finally, closed borders between the Baltic states and Belarus and Russia, the Latvian shippers have sourced locally or from alternative suppliers. The trade was expecting an earlier closure of the borders during the spring when FSC and PEFC applied their sanctions, but the physical cessation of traffic did not occur until July. This false expectation wrong-footed many in the industry as shortages were anticipated and mills even braced themselves for an uplift in price. In reality the market went in the opposite direction due to the delay in implementing the border cut-off, and this led to an over-priced glut of Baltic softwood.
Without doubt the most difficult sector in the softwood market is the structural sector, where strength graded C16 and C24 has accumulated along the supply chain at the export ports, UK quaysides and importers’ yards. Over-buying based on perceived consumption trends and supply shortages during 2020 and the first half of 2021 caused stock to rise too far. With imports in excess of actual demand, prices began softening in the second half of 2021 as end-user consumption showed signs of a downturn. The market conditions that developed at that time were also linked to a weakening in US demand, causing some larger exporters in Germany and Sweden to return their focus to the UK.
The high UK import volumes were compounded by late arrivals, which having missed the peak of demand landed with prices pitched too high, forcing importers to negotiate discounts with their shippers where possible.
At the very start of this year there was some improvement in demand, then through Q2 to date, the market followed a downward trajectory with prices crashing below cost levels. In some cases, importers with high stocks still to sell at the beginning of September 2022 could be faced with write-downs and losses severe enough to wipe out most of the profits made in both 2020 and 2021.
Several traders have voiced opinions that this negative situation might last until next April, while others take an even more pessimistic view and say it could take 12 calendar months for the market to re-balance. Pressure on the supply chain is likely to affect credit, and some importers have already started bracing themselves for late payments and bad debts.
In the quality grades of the US, fifths and sixths ex-landed stocks are said to be selling reasonably well, but consumer-led decking is very slow. The rush to carry out garden and landscaping improvements during the furlough scheme when a large section of the workforce was being paid to stay at home, saw demand peak at an unusually high level. With projects completed and people returning to work after the pandemic and facing the cost of living crisis, the DIY market hit a brick wall and large stocks of decking and sleepers are being held in excess of demand.
As with the structural grades, weakened prices in joinery specifications have made buyers ultra-cautious and reluctant to make forward commitments until prices stabilise. On the positive side, price fluctuations have not been as extreme as the C24 market, and even pallet wood has maintained a better value.
Looking at the trend of imported softwood for the first half of this year (TDUK statistics), it can be seen that all the factors mentioned above have come into play, with a Swedish rise in the UK share to 43% from the 39% recorded in Q1. Latvian volume share fell from 22% in Q1 down to 20% at the half year.
Sweden’s imports surged in June, contributing to the Q2 overall volume of imports, which reached 1,949,000m3. The total import volume from January to June was 3,414,000m3, a reduction of 604,000m3 from last year’s figure of 4,018,000m3.
If this reducing trend continues, then landed stock will eventually find its way into the market and start freeing up space at the ports and importers’ yards. Home-grown production remains under control, so the all-important factor in balancing the softwood market will be the level of demand from end users in building, construction and industry during Q4.
Regarding inflationary pressures, a high proportion of respondents to the question of increased energy costs said that they were in the middle of fixed-price tariff agreements with a year or two left to run. For those now subjected to un-capped rises going into Q4, new quotations for power seem to be averaging between three to four times higher. As an example, an average importer-merchant’s yard with two sawing and planing lines, treatment facilities, warehousing and offices paying around £100,000 per year will see this rise to anywhere between £300,000 – £400,000, an unsustainable figure for many and a disaster when compounded by falling timber prices.
In terms of running costs, electricity is only part of the equation. Since April 1 this year, new regulations came into play in the UK that stopped industry from using the lower-taxed red diesel and rebated bio-diesel for vehicle movements. Forklift trucks, cranes, and commercial heating can no longer run on the cheaper fuel, instead, companies are now being forced to run on standard white diesel, which is selling at an all-time high. Some businesses have calculated this alone will add a further £40,000 to their annual costs. There are alternatives to diesel available in the form of eco-friendly hydro treated vegetable oil (HVO) but this costs even more than regular diesel and at present has limited production.
Global fuel costs have pushed shipping costs higher, which have already led to surcharges on importers’ freight invoices, and road transport costs have virtually doubled due to fuel and wage increases. Some shipping lines are beginning to scratch around for complete cargoes as forward volumes are visibly dropping, but in terms of freight rates, they have not been able to ease costs as yet.
With energy costs escalating, the value of wood fibre as a biomass fuel has strengthened right the way through from briquettes and pellets to firewood and logs. In fact per actual tonne, wood fuel is becoming a more attractive option for those mills with the right equipment. It has come to the stage where some mills can get more for wood to burn than to build with, which completely undermines the investments made in kilns, processing equipment and grading lines. The result of poor demand is likely to affect some mills to the point where they could curtail production or even close. And in the UK it is conceivable that some importers and merchants may exit the structural market altogether once they have finally disposed of their current inventories.
