Doubly demanding days for hardwood

Some hardwood companies confess they'd like to see the EU Timber Regulation (EUTR) dumped. They clearly don't condone illegal timber, but they see the EUTR as unnecessary, aggravating duplication of their existing due diligence systems for ensuring timber is legal. One importer said he'd vote out of the EU because of it. Most of the sector, however, see the EUTR as a long-term positive; a means for simultaneously combating cut-price illegal competition and demonstrating the timber sector being serious about tackling illegal logging.

But where its majority of supporters still have doubts is over whether the sector right down the supply line will be ready for the EUTR in time for its introduction in a fortnight. There is also scepticism over claims from the regulation's political and NGO backers, that it won't cause collateral adverse impacts and casualties among law-abiding businesses.

Of course, the EUTR covers all timber and wood products placed on the EU market. But it's widely seen as the biggest ask for hardwood, thanks to generally more complex supply chains and the fact that many suppliers are in poorer countries with less developed forest and timber trade governance systems, leaving them less able, or less equipped to provide EUTR due diligence illegality risk assessment evidence.

"We've had due diligence in place for 10 years, so we're prepared," said an importer. "But this has resulted in our having fewer sources; sifting out those which can't or won't supply the information we require. The EUTR will undoubtedly widen this effect."

Ivory Coast supply Another UK importer said some of its suppliers had already "fallen by the wayside" because of the EUTR due diligence mechanisms it had introduced. "The country on everyone's lips here is Ivory Coast. In our analysis only two suppliers made the EUTR grade, so we'll be seeing less Ivory Coast framire."

At the same time, some demonstrably legal suppliers are reported to be just overwhelmed by the volume of due diligence information requests. "They're being bombarded with different EUTR questionnaires from across Europe. It's a huge task for smaller suppliers."

A Europe-based importer said that it was in the interests of the European trade to steer suppliers through the EUTR process. "The EU should put more resources into helping them, and in promoting legal timber, to encourage as well as enforce compliance," he said. "But we should also be supportive; not just abandon perfectly legal suppliers because they don't have the right systems in place yet."

Lack of understanding Several 'operators', as companies which first place timber on the EU market are labelled in the EUTR, also highlight continued lack of understanding of the regulation by customers.

"They are 'traders' under the EUTR, so only need to keep records of what they bought from which 'operator', and where they sold it, but they are demanding full chain of custody back to suppliers," said an importer. "Our supplier database is our business, so we're not disclosing it, but certain customers threaten not to buy from us if we don't."

Another importer/distributor agreed. "The Timber Trade Federation has done tremendous work explaining the EUTR, but some 'traders' remain confused. We need a simple pocket guide listing everybody's obligations."

And getting to grips with the regulation has not been made any easier by the fact that it is being implemented in difficult trading conditions. One importer described business as "seriously tough". "October to December no-one was moaning too much, but now it feels like we've dipped back into recession," he said.

Another importer/merchant said it was "more or less on target", but acknowledged business had slackened off. "We're just about where we planned to be by now, but after a reasonable November to January, with particularly good demand from the top end furniture and kitchen sector, things are quieter now than we'd like," he said.

"The main problem is a further downturn in construction, not helped by the weather, but we're also seeing repair, maintenance and improvement projects, which had been a bright spot, cancelled or delayed," said an importer. Business also remains short term, or as one company said "it's RIP forward ordering".

"We're finding sales steady across the species," said an importer. "But it's hand to mouth, as it has been since 2011. You have good months, but start at zero the next. It means being attentive to every aspect of business."

The consequence of the state of trade is heavy discounting, with one trader describing the market for what seems to be the prime species for price cutting as "sapele wars".

"Companies clearly need to turn stock into cash," he said. "We're seeing sapele offered as low as £20/ft3."

At the same time hardwood traders report that they are facing supply prices firming across the board - particularly in sapele and dark red meranti (DRM) - mainly due to the weakening of the pound against the euro and, to a lesser extent, the dollar.

"We were at €1.23 to the pound and are now around €1.16-1.17. That's a 5-6% swing, which is obviously difficult to pass on at the moment," said an importer.

Some companies expect sterling to recover, with one as a result "buying nearer to the time we need to deliver" to avoid accumulating stock at current exchange rates. But even if the pound strengthens, it's felt that supply pressures will continue to underpin prices.

"Supply rather than sales is now our main budgeting focus," said an importer. "A key factor, mainly in Africa, but Asia too, is that suppliers are over-sold. Demand is growing worldwide, but they haven't restored production to pre-recession levels so they've made commitments they can't keep and we've had to reschedule orders."

Other potential inflationary pressures include reported growing scarcity of standing sapele in some areas and rumoured plans for a kiln-dried export tax in one African country. Embryonic recovery in American construction is expected increasingly to drive US prices too.

"We're already seeing poplar moving up, particularly four quarter for kitchen cabinets," said an importer, adding that he expected combined supply and currency factors to "feed overall price rises of 10% into the system through 2013".

Freight rates are a mixed picture. One importer reported no significant movement recently, while another agreed with this ex America and Africa, but said ex Asia rates were "volatile with a propensity to rise". An importer/merchant had also heard predictions of an "across the board" 10-15% rise later this year.

Mainstay species In terms of species, sapele, meranti, European and American white oak and walnut remained the mainstays, while all bar one importer said maple and cherry continued to fall out of favour. Framire was also reported to be increasingly substituted by sapele, at least in part due to EUTR-inspired concerns over legality. And the same seems to be happening with DRM, said an importer, due to sapele's "superior properties and availability FSC certified".

Several companies also commented on the increasing popularity of engineered/laminated hardwoods, notably sapele and eucalyptus.

"They're more expensive, but low waste," said an importer. "In sapele, you also get long lengths that are now scarce in solid timber, while eucalyptus has impeccable ecocredentials and has been boosted by Timbmet's Red Grandis marketing."

Projecting forward, the hardwood consensus is that 2013 is going to be testing. "Dealing with the EUTR, or competitive market conditions in isolation would have been demanding enough - both together is a challenge," said an importer.

At the same time, companies still say they remain confident about meeting that challenge and longer-term prospects.

"It's tough, but we're selling timber, developing new products and winning new customers and, once the upturn comes and we have the EUTR fully in place underlining our environmental commitment, we'll be well placed to take advantage, " said an importer, adding that their company was demonstrating its optimism by expanding its apprentice programme.

EU ISSUES FINAL GUIDANCE ON EUTR
The EU Environment Directorate-General (EDG) has issued a final guidance document on the EU Timber Regulation, after consultation with timber industry and other stakeholders prompted calls for "further clarification".

The 27-page document (ec.europa.eu/environment/forests/timber_regulation.htm) defines EUTR terms such as 'negligible risk' of illegality and 'first placing on the market'.

It also focuses on the EUTR obligations of businesses in the different parts of the supply chain; 'operators', the businesses that first place timber on the EU market, and their 'trader' customers. It says that the position of agents/brokers, which had caused particular industry concern, will "need to be determined [by individual] contractual arrangements". "An 'agent' who purchases and brings stock into the EU to meet anticipated orders from buyers will be an 'operator', unlike a true agent who acts only on behalf of another party and at no point takes actual ownership of products," it says. It further illustrates this on p22 with fictional trade scenarios involving agents performing these different roles.

The EDG has also launched a new EUTR website: ec.europa.eu/environment/eutr2013/

MIXED PICTURE ON HARDWOOD IMPORTS
According to the latest Timber Trade Federation Timber Statistics Report, UK timber imports were up 3.7% to 401,000m3 in the 11 months to November 2012.

Volumes from France and Italy were down, but US, German, Malaysian and Cameroonian quantities all rose.

Meanwhile, the latest International Tropical Timber Organisation (ITTO) report shows EU tropical timber imports 12% lower at 778,000m3 in 2012, thanks to generally depressed European economic conditions. It also says the EUTR is now influencing import trends. The current short supply of sapele is attributed in part to EU buyers focusing on a smaller number of larger exporting companies better able to provide EUTR compliant legality assurance. Rising demand for secondary species backed by proof of legality and sustainability is thought to be another consequence.