The softwood market has been trading on a high since April 2020, and for the 18 months up to the beginning of October 2021 producers could hardly keep pace with demand. Log prices accelerated, particularly in eastern Europe, and the cost of softwood kept rising rapidly through the whole period. The value of forest products, and softwood in particular, finally reached a level reflective of the massive investments ploughed into the industry over many decades.
Not only did the industry invest millions of dollars, euros and pounds in upgrading machinery and employing the most advanced technologies, but it has played a leading role in planting and reforestation.
The softwood industry has been planting trees and expanding forest growth far in excess of extraction, while at the same time producing the most environmentally-friendly products available for construction and packaging.
In spite of being a building product with the highest mechanical and environmental credentials, the market price of softwood has struggled to keep pace with inflation for many decades. Compared with other products it’s value has virtually stood still until finally catching up in a concentrated period through 2020 and to the end of Q3, 2021. Then in September 2021, the market price fell backwards gaining a downward momentum through Q4. Taking into account market levels in December, softwood appeared to have weakened by around 23% from the peak levels seen in June and July, 2021.
There were a number of reasons for the decline, least of all over-purchasing, but to date in January 2022, it has not dropped anywhere near the unrealistic levels of 2019 when prices went rapidly backwards by more than 35% over Q2 and Q3 and from a much lower starting level.
To get some idea of the current situation an allowance must be made for timing, because data collated from import statistics trails around two months behind actual shipments. The trend for last year is showing that at the end of Q3 over 6.2 million m3 had landed, with a mean average of 692,000m3 per month. If the last quarter followed that average monthly trend, then imports could in theory reach over 8 million m3 whereas demand for a whole year would normally be around 6.5 million m3. However, October imports cooled considerably at around 569,000m3 and with the seasonal downturn expected for November and December then imports could come under control during January 2022. In addition to the seasonal effect, some buyers have been trying to cancel or renegotiate and delay as many un-shipped contracts as possible, particularly those agreed at top prices.
With such a background of high imports and quieter trading, it may take until late February or March before supply and demand come into balance and new contracts start shipping. Everything rests on demand being strong enough to clear the ports and reduce inventories.
The latest projections released on December 2 from the United Nations Economic Commission for Europe (UNECE) Rome meeting, uprated the UK to a potential import figure of 7,345,000m3 (6,677,000) for 2021, and an uplift in apparent consumption by 997,000m3. If that consumption figure for 2021 was realised, then a better balance would be achieved between softwood imports and demand.
During the first nine months of the year, cargoes were falling behind contract arrival dates. This was down to sawmill productions trying to catch up, in tandem with global shortages in road transport capacity.
The blockage of onward transport caused a rise in stocks held at UK quaysides, which in many cases forced terminals to stop further arrivals by vessel. This went back along the chain to affect some of the export ports, for example, Riga, where goods were backed-up on the quayside to the point where loads from the mills were being refused entry until some of the volume got shipped.
A further knock-on effect from the overwhelmed quaysides was the difficulty experienced by shipping lines in plotting sailings. Some were forced to delay or reroute vessels to carry other products into different countries.
As with many materials, softwood is time-sensitive and when delayed contracts finally started arriving, demand was coming off the boil. Once the seasonal aspect of the market kicked in during Q4, importers found that goods had arrived too late to sell in 2021, or to sell at the anticipated price and the effect of that has overlapped into Q1 of 2022.
Some construction and housing developments lost pace due to material shortages in other basic products such as bricks, with sites being forced to close. Several merchants dealing with larger builders received cancellations for roof, joist, and first and second fix schedules as a result. Also, where sites suspended operations, skilled labour (which was already in short supply) could be lost indefinitely to contracts elsewhere in Europe, impacting future build rates.
Carcassing and joinery grades alike have been affected by current market conditions, and reflected the same issues of falling demand, high inventory levels, and price vulnerability. However, pallet wood has been flowing reasonably well and one port contact confirmed that loads of boards and block wood were being called off at a fast daily rate. Pallet wood traders said that the market had remained steady, but transport capacity and rising logistics costs were starting to affect trade. On a positive note, pallet and packaging manufacturers are seeing new orders coming through for this year.
Turning back to the latest UNECE’s figures and forecasts, there were some noticeable revisions of data in addition to the figures already quoted regarding UK imports and consumption. The data for 2020 was finalised, and the projections for 2021 and 2022 adjusted to take into account developing trends.
Germany increased production during 2020 by more than 1.2 million m3, from an estimated 24 million m3 to 25.2 million m3 and the figure for 2021 has been uprated to 27 million m3 with a repeat in 2022. Although Germany is a large exporter, currently averaging around 10.5 million m3, it is the largest consumer of softwood and is expected to absorb 22.5 million m3 in 2022.
German producers were heavily committed to the US, but when the price and demand fell back in July, they released volume back into Europe and the UK, which had a detrimental effect on market prices – particularly affecting CLS.
Exports from Latvia in 2020 increased to just over 3 million m3, an increase of 12% against the projection, and forecasts for the whole of last year and for 2022 predict a stable volume of 3 million m3.
Sweden’s exports for 2020 reached just under 14 million m3 and came close to the prediction. Exports were expected to close 2021 at around the 13.1 million m3 mark then fall to 12.9 million m3 in 2022. Finland’s exports also performed within the predicted range for 2020 at just under 8.2 million m3. Forward predictions see that figure increasing to 9.2 million m3 for 2021, and rising to 9.4 million m3 in 2022.
The US market, which proved the biggest driver of 2020-2021 price increases, consumed 86.12 million m3 (actual) against a predicted 83.4 million m3, an increase of just over 3%. For 2021 and 2022, the US is forecast to hit an average of 88 million m3. US prices collapsed quite spectacularly during 2021, but current trends are rising briskly again giving hope to the trade that European and British prices will firm and stabilise from Q2 and onwards in 2022.
To counter an uncertain market, several Nordic groups are keeping a very tight grip on production, and there is every reason to expect Baltic mills to make any necessary cuts until demand picks up. It will be interesting to see where Latvian log prices will settle in Q1 of this year as the mills cannot afford to continue paying top level prices and selling into a weak market.
For the present UK market, several traders are still working on written-down stock to turn inventories back into cash. For many, this is the most tax-effective method of deflecting the full force of falling prices. As stocks fall and the market begins to get back on track, the trade will then be coming to terms with a number of inflationary factors which will have to be faced. Shipping and transport costs are already on the rise, and more ports are becoming inventory-led, meaning that bulk storage that may be free at the moment will start attracting quay rental. On top of those, costs will be increased – fuel and energy costs, wage inflation and rising distribution charges – the same factors that will hit all sectors of the global economy.
