Summary
• Supply is tight because of production cuts.
• Harvesting levels have also been reduced.
• Prices have risen because of shortages.
• The krona/sterling exchange rate has provided some advantage.
Production cuts in Sweden over the past year have created an inelastic supply of timber and mills are now struggling to meet what is still generally low demand.
“There’s no wood around,” said one shipper. “Stocks are dry.”
Some customers are now realising the extent of production curtailments – not just in Sweden, but across Europe – and weighing that up against their low stocks and short order books. “It has made customers nervous and they have all jumped at the same time,” said another shipper. “Now we have no chance to meet the short-term demand that the market is trying to force on us.”
However, another contact saw it in a slightly more positive light. “We have seen positive signs throughout this year, not necessarily in demand but in stabilising of production. In the second quarter we have had good deliveries and seen price increases in all products,” he said. However, he added, the company was having “some trouble meeting demand”.
Reduced capacity
The amount of capacity removed from the market has even surprised some in the industry. “Production containments have been bigger than I would have expected,” one contact told TTJ. “We often hear a lot of talk that people want to hold back production but often it’s more talk than action; this time it’s quite the opposite.”
Another concurred. “For us to be here tomorrow and next year we cannot continue the way it’s been. The sawmills have to take responsibility and not overproduce. I’ve been in the business nearly 30 years and I’ve never seen such a change in culture.”
Preliminary estimates by Skogsindustrierna indicate that the yearly pace of production in the first quarter was 20% below that of the production peak of 2007. However, the organisation stressed that this was not a forecast of production for the rest of the year. The reduced output was the result of curtailments, rather than permanent closures, but reductions in harvesting may also set limits on production.
Harvesting levels have been reduced, partly because of an oversupply of pulpwood, and the effect is expected to reach into the end of the year. One shipper still had some storm damaged logs in stock from four years ago but these were now running low and he anticipated some difficulties in speeding up harvesting to meet production. If the elastic between supply and demand stretched any further, mills would have trouble supplying the market.
Prices strengthen
The tight supply of sawn timber has strengthened prices but it is difficult to predict how long this will last. “We’re in this situation through to September or October; beyond that nobody knows,” said one contact.
Trading is made more difficult by the continuing restrictions on credit insurance. “If anything, credit insurers have got worse; they are wiping credit limits every day. Good solid names are being withdrawn,” said one contact.
While there is still little demand from the Swedish or European construction industry, the renovation sector – a larger market for timber than new build – has been more robust. “The renovation market is holding up; we are still losing volumes but it is a much better picture than new build,” TTJ was told.
For one shipper, North Africa – “the biggest driver of all times” – has proved to be something of a saviour. The strong economies combined with the decreased supply of Russian material had turned the region’s attention to Sweden, making it the UK’s largest competitor for redwood supplies. “All in all this is creating one hell of a fight for wood,” he said.
The favourable krona/sterling exchange rate has also given Swedish shippers a slight advantage and some think this has helped them gain market share in the UK, although this has to be seen in the context of a difficult market. “It’s meant we’re in a better position compared with European producers on the export market, but that’s all,” said one contact.
Economic forecast
This is reflected in the findings of the National Institute of Economic Research’s business tendency survey for April. The survey predicts that sawmilling and manufacture of other wooden products is “on the way up” and survey director Roger Knudsen told TTJ this was based on Swedish companies’ competitiveness in export markets.
“It’s quite weak recovery but it may be the strongest signs of recovery in manufacturing at the moment,” he said.
The good weather in the UK in April boosted demand for garden products but sawmills cannot meet the orders. “We’ve had a number of customers come on to us looking for decking specifications but we simply don’t have the wood,” said one shipper.
While this may be frustrating for sawmills, there will have to be a big improvement in confidence before they increase production again. One company thought production might rise slightly within the next few months but another said they would wait for the economy to climb out of recession before any changes were made.