Summary
• Some large producers are planning further cutbacks in the last quarter.
• Many UK buyers are holding out on ordering, anticipating cheaper deals.
• Merchants are taking a short-term view of the market.
• There are growing gaps in some specifications, such as CLS and roofing battens.
• Redwood is in shorter supply than whitewood.
• Log supplies are under pressure in all supplying countries.
As softwood mills return to production this month they are indicating that there must be a further increase in selling prices. This stance is being taken regardless of the current uncertainty in demand, and their resolve is likely to be strengthened by the serious losses reported in the first half by some of the large forest products corporations.
These losses were mainly due to poor market conditions, and either the lack of raw material or its relatively high cost against the market price for sawn goods. As demand continued to fall below expectations, many sawmills pursued a policy of sustained production cuts during the first half of the year, causing a tightening of supply. This created shortages in several grades and sizes, and importers’ stocks gradually became depleted.
Some large producers have promised more cutbacks and closures for the last quarter of 2009 in a bid to reduce and keep a firm control of their costs. At the same time, they will be effectively reducing output to a point where supply is unlikely to exceed demand for some time.
Cheaper deals?
Many UK buyers are still holding back from covering their requirements for the last quarter because they anticipate cheaper deals when production starts to increase. They also believe that demand will be below expectations, and this will influence shippers to cut prices in order to create turnover and clear their stocks.
Against this policy lies the real prospect of shippers achieving better results in other markets and a widening gap in specifications on offer, with many of the most popular sizes becoming outsold. This could lead to an acute shortage of softwood in the UK, and a lack of offers from exporters. One importer commented that he was already meeting higher prices for whitewood from Swedish shippers, and levels were e16/m3 higher than he expected for October shipment.
In the UK market, carcassing prices have firmed but do not reflect the replacement costs that shippers have in mind. August has proved to be a disappointment after a relatively buoyant July, making the trade extremely wary of allowing stocks to rise, and paying more than they have to. Merchants are taking a fairly short-term view of the market, picking the best lengths and sizes from the inventories terminal operators are holding on the ground.
But there are growing gaps in the specifications and, even with the current downturn in demand, stocks are becoming depleted. Some distributors are in need of replacement cargoes to satisfy existing orders, following an active selling period through July. While the majority of terminal operators are adequately covered for September shipments, sales in hand are already sufficient to ensure there will be little chance of over-stocking. Items such as CLS and roofing battens are already in very short supply.
Even lengths
One quay operator commented that there was a growing requirement for even lengths only, and this was not an attractive proposition for shippers who would risk accumulations of 3.3, 3.9 and 4.5m lengths if they accepted such conditions.
Forestry yields, and the subsequent sawmill throughputs, would not be economic if odd lengths were totally rejected by buyers. Not only would such a condition prove wasteful, but sawmillers would still have to charge for any call-backs, and prices would rise to compensate in the long term.
This move towards even lengths generally reflects UK merchants’ racking space, and the lack of room to keep all lengths. Under normal trading conditions when new build housing is under construction, odd lengths are in demand as they are widely specified for joists. Larger, more specialised distributors normally keep them in stock, but in the current market, demand from the national housebuilders is low and odd lengths are turning over slowly.
Redwood shortages
Redwood shortages have become far more acute than whitewood, due to sustained periods of production cutbacks, mainly in Finland and Russia. At the same time, Swedish producers have been selling substantial volumes to other markets (such as north Africa) and achieving higher prices than in the UK. Also, some Swedish mills have reduced production of basic joinery specifications in favour of special end user grades, wood components and value-added products for DIY outlets.
Starting in 2008, a number of the Finnish giants embarked on a programme of production cuts that reduced export volumes significantly. In many cases, this was driven by a slump in the pulp and paper industry, a much larger market than solid wood, and sawmills continually found themselves short of logs as harvesting became more restricted. Now the effects are being felt in all the buying countries as Finnish export volumes have plummeted.
Russian exports
Exports from Russia have declined stead-ily to the point where only a handful of shippers are trading with the UK and western Europe. One UK importer commented that lack of supply had caused a significant contraction in the UK/Russian softwood trade, and the situation was likely to get much worse as there was so little being offered from the regions of Archangel and Karelia. Also, in recent years, Russia’s export trade in Siberian forest products to China has been increasing, leaving very little in the way of sawn goods for UK importers.
The shortage in the redwood market has created a significant recovery in the pricing structure. Since March, levels have regained ground steadily, and current arrivals are now costing an extra £35/m³ (€41) on average. The north African market pays higher levels again, and shippers can achieve a further €30/m³ from countries such as Algeria where demand is still holding firm.
Several shippers said that they believed redwood prices would continue to firm, but the next increment to the UK would probably plateau at €8/m³ higher during the last quarter.
Rapid change
If there is any significant growth in other markets, such as the US, which is currently classed as dormant, then the picture could change rapidly. There are few exporters who have fully discussed cargoes for October shipment as yet, let alone November and December. If demand was to improve on a global basis, then redwood prices could continue to rise as supply fell short.
On the raw material front, log supplies are under pressure in all supplying countries, and costs are rising. Where prices fell back earlier in the year, in countries such as Latvia, they are recovering steadily. Swedish and German mills have sufficient volumes of whitewood available, but mills are now passing rising log costs on to buyers in the price of sawn wood. German log supplies are coming under pressure where large sizes and long lengths are required. The mills are being hit with extra premiums as A-grade logs for cutting 250mm and wider are becoming scarce due to felling controls.
The forward market price for softwood is increasing, and although demand is still weak, supply has reached the point where the trade will witness shortages not just for the rest of this year, but well into 2010.
