Russian volumes build

Summary
• Russia is facing competition from cheaper Scandinavian products.
• There are backlogs at some mills in northern Russia.
• Russian mills are standing firm on redwood prices.
• Last year Russia exported over 51 million m³ in logs, with China taking more than 40% in volume.

With virtually no change since the close of last year, all traders are faced with a global surplus of whitewood at the sawmills, on the quaysides and in importers’ and merchants’ yards. To make matters worse, as well as a slow and overstocked market to contend with, Russian shippers are facing very stiff competition from some of the larger Scandinavian producers who are moving into the Continental markets with cheaper prices.

This has caused a backlog at several of the large softwood mills in northern Russia, and some are holding volumes of unsold spruce in specifications already cut for markets such as Germany, Holland, and Ireland. But in spite of the substantial volumes that are available, according to one contact, the mill lists contain little in their specifications that would interest British buyers.

On the ground in the UK, importers are still generally overstocked with softwood, both in redwood and whitewood, and prices are tending to be cheaper from landed stock than on a forward basis. The common goal among importers seems to be the need to turn stock back into cash as soon as possible, so sales are being made in some cases below the current replacement cost.

High volumes of redwood

While whitewood is the main problem, there are also some high volumes of redwood at the terminals – but the specifications are fairly well spread with no serious gluts in any one dimension. Current demand is said to be poor, but most traders are confident that their redwood inventories will be trimmed sufficiently by the end of February and that new cargoes expected to arrive from March onwards will be needed to satisfy demand in the springtime.

Last January, importers and merchants were busy covering their decking requirements, but so far this year, there are very few enquiries circulating. One reason is that some traders still have stocks left from last July, when storms caused widespread flooding and many garden projects were abandoned for the rest of the year. So, tight stock control will be an essential business tool for all companies this year, as demand is likely to remain unpredictable.

Many traders have also voiced their concerns regarding credit terms and late payments, adding further pressure to existing problems faced by wholesalers.

Agents and importers report that forward discussions with Russian shippers have resulted in a common outcome: sawmills are standing firm over redwood prices. One reason for shippers to be cautious about under-pricing is that sterling has dropped dramatically against the euro in the past few weeks to around €1.33/£1 in the week ending January 11. This is a drop of more than 12.75% against the high exchange of €1.53 reached at this time last year. This weakening trend in sterling has also been reflected against other currencies of major timber exporting countries like Sweden, where the pound has dropped against the krona by around 10% since last June, and in Canada, where the drop exceeded 15% since the beginning of 2007.

This recent spate of lower sterling exchange rates will put pressure on the producing countries dealing in the UK, and make it difficult to maintain current price levels without loosing money. It is clear that if the exchanges remain at today’s level (or even worsen), then prices must increase in the not too distant future, and this will affect redwood and could initiate a recovery in whitewood. In the latter case, it will also depend on the production volumes in Germany and Sweden.

Major role in economy

From the Russian government’s point of view, the forest products industry is of major importance to the Russian economy, and it has been advancing steadily since 2004 as the general economy has grown and personal income in the main cities has risen again by more than 10% during 2007.

Last year log production was estimated to be over 190 million m³, with exports hitting over 51 million m3. The largest buyer was China, which took over 40% of the volume, followed by Finland at 26%.

This year it is estimated that log exports will fall back to around 45 million m³ as the effects of the export tax on logs filters through, and at the same time internal demand is expected to increase.

Sawn softwood exports have grown over the past two years from 14.3 million m³ in 2005 to 15.5 million m³ in 2006, and to an estimate of just under 17 million m³ in 2007. This figure is expected to increase in 2008 to over 18 million m³, but current global market conditions in the softwood industry make this doubtful

As 2008 trading gets under way, the high volumes of Russian stock that remain unsold on the quayside will hold back the true and underlying market level until the stocks are cleared or brought into balance. There is an element of optimism in the trade that demand will pick up, but a closer match between supply and demand will be needed to avoid overstocking.