Northern European mill owners have taken time during the holiday season to evaluate market conditions in the hope that September will bring some improvement in demand. Most export markets have been quiet since June and, in many cases, selling prices have slipped back marginally.

From a shipper’s point of view, log costs are still relatively high and the situation doesn’t give mills any room to reduce prices any further. This position leaves exporters only two real choices to protect finances in the current economic climate: continue expanding into emerging markets, or cut production.

Latvian mills have been regaining some UK volume from home-grown producers where they can offer better specifications, including C24, but they have taken the greatest share from Swedish mills due to the fact that the krona has been strengthening since mid-May – gaining 3% over sterling’s value in August alone. As sterling has strengthened against the euro, it has allowed Latvian mills to reduce selling prices in sterling and make their products more competitive than the Swedes.

Sawlog volumes recorded at the majority (67%) of Swedish mills had dropped at the end of the half-year by some 20% compared to figures produced for the same period in 2011. The main reduction was in the north where fibre under bark fell by over 300,000m3 whereas in the south volumes were closer to last year’s levels.

In the first half of this year, Swedish softwood production fell by an estimated 1% below the same period last year, according to Swedish Forest Industries Federation data. This year’s figure includes a reduction in the whitewood cut and a balancing rise in redwood of around 4%.

By the end of July, shippers’ stocks fell by more than 10% from the half-year at the end of June, with an estimated overall drop in redwood of some 135,000m3 and a reduction in spruce of approximately 190,000m3.

Swedish production levels and export inventories tend to dictate market trends in northern Europe, and an upturn in either statistic is always a cause for concern among all producers. Any decrease in current stock levels is always seen as a positive sign, but between 2011-2012, redwood inventories increased by 40,000m3 (4%).

In Finland, production through the first six months fell by about 3%, but in June alone there was a slight rise of around 1.5%, attributable to a 5% growth in redwood output, while whitewood production dropped by 3%. Overall, Finnish inventories closed 1% lower at the end of June, compared to the same period last year.

While prices among northern European producers have come under pressure, there has been a marked improvement in North American lumber markets, and OSB together with plywood is also in high demand. A contact in Canada confirmed that a rise in multi-family dwellings had given domestic markets some buoyancy, although there was a long way to go before housing construction was back on track.

For Canadian western spruce producers, current prices are 40% up on the same time last year. On the east coast, SPF prices are reported to be around 29% higher, although the mills are achieving a 30% premium on basic selling prices. West coast shippers continue to rely on Asian markets and the Middle East for their largest export volumes, and China remains a major buyer. This export position is generating some stability, as mills in British Columbia aren’t dumping large volumes on the domestic market.

Below expectations
These signs of strengthening in the North American wood products market are not being mirrored in western Europe, where demand is falling below expectations.

In the Netherlands, for example, softwood traders have reported a drop of up to 30% in turnover for the first half, and most now accept that the market is unlikely to improve in the foreseeable future. Whitewood, the most-used species, has dropped between €5-8/m3 in spite of the weakening value of the euro against the krona, and Swedish imports have fallen back by over 20% between January and August. This general weakening has also been felt in Belgium and in France where Swedish imports are down by more than 15%.

Swedish exporters have offset the decline in shipments to the US through a growing trade with north Africa, particularly Egypt, Algeria and Morocco where increases during this year alone are close to 40%.

Most Continental importers have been selling sawfalling whitewood into the construction and end-user markets based on quality grading but, with the onset of EU marking, there is a move to switch to strength-graded material. One contact said that there was also a growth in demand for FSC-accredited wood in the Dutch markets as opposed to PEFC. Wood strength graded to BS 4978/BS 5268 has been used in the UK since the late 1970s, supplying technical, rather than cosmetic grades to the construction industry.

In the UK, the construction industry has reported some recent success stories, notably the Bovis Homes Group, which increased its building rate by 18% in the first half. In reporting its results, the company said its main activity was focused in the south, and noted how difficult it was for first-time buyers to secure funds to get a foot on the housing ladder.

In spite of the government’s well-publicised desire to boost the economy through loans to SMEs, many UK businesses still remain highly critical of the interest rates charged by the high street banks, and this comes at a time when inter bank lending rates are at rock-bottom levels. As one joinery contact said: "It is not viable to borrow at current rates, and remaining lean and cautious is the only tactic to employ to survive current economic challenges." He added that this was thwarting demand for timber by holding back investment in expansion. Only the larger companies seem to be able to secure borrowing at competitive rates.

Softwood importers and merchants in the UK report that business is holding up reasonably well, but most are experiencing demand in fits and starts at best, and confirm Bovis’s view that the stronger markets remain in the south. In many areas, credit terms are being stretched as a growing number of customers take longer to pay. Importers are duty bound to report late payments to their credit insurers, and overdue payments are leading to customers’ credit limits either being reduced or withdrawn.

Carcassing prices have edged back by an average of £3/m3 since January, but traders can live with these relatively firm prices and hope that exporters will keep tight controls over production volumes.