• German sawmills are expected to produce around 23 million m³ this year.
• The industry has invested in increasing capacity in the past three years.
• Domestic demand is strong.
• Pressure from Scandinavian and eastern European imports has intensified recently.
• Softwood log prices will continue to rise in the second half of the year.

German softwood lumber producers rapidly overcame the market slump in 2009 caused by the economic slowdown when it came to deliveries and have since raised their output significantly. Nonetheless, sawmills continue to battle unresolved structural problems connected to surplus cutting capacity.

German production capacity is currently too high compared with available softwood log arisings and so competition for this increasingly scarce raw material is intensifying. At the same time, German softwood lumber consumption has not risen enough in recent years.

Softwood lumber exports have been surpassing imports in terms of their quantity since 2005 yet the German sawmilling sector still does not undertake industry-wide export promotion.

Capacity surplus

Even though business has been satisfactory in the first half of 2011, the overall economic situation facing sawmills remains taxing and has even worsened in some sectors. Businesses have yet to eliminate the capacity surplus, and comprehensive consolidation in the sawmilling sector, like the one recently seen in the German wood-based panels industry, has yet to materialise. Consequently, competition among sawmillers is expected to remain heated in regional, domestic and foreign markets for the time being. Its potential impact on speeding up the much-needed industry consolidation remains to be seen.

The sawmilling industry is forecast to manufacture almost 22.5-23 million m³ of softwood lumber and planed goods this year (representing an increase of 6-8% on 2010 according to Association of German Sawmilling and Wood Industries). This would mean German softwood lumber and planed good output would exceed levels recorded during the crisis year of 2009 by roughly 14%. But, while this represents a reasonable upturn, it must not be forgotten that German sawmills produced 26.77 million m³ of lumber pre-crash in 2006.

Robust domestic demand

This recent increase in lumber production has been driven in large part by very robust domestic demand. Customers’ relatively low inventories at the start of the year, stronger new construction activity, as well as the German economy’s generally very brisk exports paved the way for unexpectedly lively demand for lumber early on in the year. Deliveries of glued and construction timber rose 10-15% in the first five months, with softwood lumber buyers in the packaging and pallet industry registering a leap of as much as 30-40% in sales figures compared with last year’s already satisfactory level. Domestic softwood lumber and planed goods consumption hence looks set to reach close to 20 million m³ this year, after climbing to 18.26 million m³ last year.

German domestic softwood lumber prices surged quickly during the first quarter of this year as demand strengthened. This upward spiral in domestic prices continued into the second quarter until at least mid-May. At that time, prices were already an average of 12% higher than at the start of the year. However, as the domestic market started to become saturated through May, demand stagnated occasionallly dipped again. Additional price increases thus became out of the question, with sawmills’ inventories of finished goods building and the first signs of mounting pressure on prices emerging.

The outlook for the second half is rather patchy at present: a widespread improvement in demand that might offset slower domestic sales has yet to surface in key export markets. The import pressure from Scandinavian and eastern European lumber producers’ intensified sales efforts has also strengthened noticeably over recent weeks.

To cap it all, the current supply surplus and limited raw materials availability means that softwood log prices will continue to edge higher during the second half. In Germany spruce logs currently command €98-99/m³ for B/C grades with a mean diameter of 25-29cm, just slightly below the record level seen at the end of 2006. Pine log prices have already set a new record. Regional price variations within Germany have now largely vanished into thin air. With the exception of years when high winds felled large amounts of roundwood, competition among softwood lumber producers for this raw material is pushing procurement and transport costs higher and higher.

Economic casualties

The economic crisis in 2009, the competitive situation created by structural problems in the industry, as well as fluctuating sales prices for softwood lumber and sawmilling residues have made a dent into quite a number of businesses’ liquidity. Companies that had previously financed their expansion strategies using borrowed capital were the main casualties. Unforeseen market developments in the US, north Africa and most recently Japan, raw material procurement problems, technical difficulties or declining revenues as a result of mismanagement compounded the situation facing a few major German sawmill operators.

The list of embattled major players includes Klenk Holz AG (Oberrot), Klausner Holding Deutschland GmbH (Saalburg-Ebersdorf), Rettenmeier Holding AG (Wilburgstetten) and Holzwerke Pröbstl GmbH (Fuchstal). The problems facing Klausner led the company to sell three of its five sawmills, thus breaking up the group. In 2009, Klenk parted ways with its loss-making French subsidiary and now the company is for sale as a single unit. Rettenmeier is expected to make decisions on restructuring in the near future.

New capital investment

Despite having surplus capacity, the German sawmilling industry raised its cutting capacity again over the past three years by some 2.7 million m³. These capacity increases included the start-up of a sawmill in Brilon run by Egger Group, which is headquartered in the Austrian town of St Johann. Heggenstaller Holzindustrie GmbH’s has also invested in a new sawmill in Lauterbach, Rettenmeier in its Ramstein facility, while Bien Holz GmbH is developing another plant in Uelzen. Conversely, the dismantling of sawmilling machinery at the former Klausner Holz Niedersachsen GmbH facility in Adelebsen for shipment to Södra’s Värö site in Sweden, was the only major capacity cutback, apart from the closure of several smaller mills.

Machinery suppliers feel that a major investment backlog has formed in German sawmilling over the past few years, which will be slow to dissipate given continuing uncertainty about the future of the market. Amid a mounting shortage of softwood logs, investments focusing on improving yields look likely. But while German sawmillers fail to take lasting steps to curb capacity an overall imrpovement in their economic fortune does not look likely any time soon.