High demand catches importers off guard

The softwood industry has been through some extreme changes since February. Due to the effects from the Covid-19 pandemic the trade was forced into a lockdown position that brought wide ranging restrictions across the country. While some businesses benefited by staying open, others who closed their doors completely suffered a major economic trauma which rippled through many different industries throughout the UK.

The building and construction sectors were heavily affected, and it is now estimated that working under social distancing regulations, labour shortages and delays, the construction industry has seen productivity levels drop by as much as 35%.

When the lockdown began to take effect in mid-March, high numbers of sales and administrative employees took to self-isolating and worked from home, while others were furloughed. As the infection spread, timber companies expected sales to nosedive with a huge drop in demand.

Consequently, UK importers believed volumes of unsold softwood would mount up quickly on the quayside and several delayed their forward shipments. They were concerned that a re-run of Q1 last year might be created when too much volume was shipped in a short space of time due to fears of a Brexit deadline. In the event, that particular issue turned out to be misjudged as the deadline of March 28 to leave the EU was extended. In any case, softwood imports would not have been affected by legislation or tariffs, but shippers and importers alike rammed wood into the ports.

As the lockdown started to bite in April this year, demand improved well beyond expectation with timber merchants’ cash business increasing dramatically, with high demand from the DIY market. All over the country, queues were forming outside the big trade and retail warehouses to a point where lines of customers hundreds of metres long were seen snaking around the carparks waiting to get in.

The government’s message to keep sectors of the building trade operating, particularly on essential services projects, gave some builders merchants the chance to continue operating but as long as they stuck to social distancing rules and, when necessary, quarantined infected staff. To comply with guidelines, the merchants restricted the sales of products on a delivered only basis, or in some cases customer collections were arranged by appointment only.

Most contacts agreed that from the middle of April and at least through to the end of June, sales, margins and cash flow improved to a level unseen in recent years. The only factor holding back sales in timber products was caused by shortages appearing in stocks. The main softwood products affected were decking and landscaping products where in some cases, such as treated sleepers, demand was said to have more than quadrupled.

These shortages were soon followed by wider stock gaps in strength-graded construction specifications as demand for the most commonly used lengths increased dramatically from end-users.

As landed stocks became short, so wholesale prices benefited from the lift in the market, making some progress to recover from the rapid devaluation seen through 2019 when prices crashed.

On the forward market, the export mills have been revising prices upwards as demand has stayed ahead of supply. In the Baltic states, increased log costs have forced up the export price of softwood in euros, and those increases have been further accentuated by the falling value of sterling. Through the second quarter, the pound fluctuated between €1.15-€1.095 / £1, a swing of more than 4.5%.

As the trade moves into July, holiday closures across the Nordic sawmilling industry will accentuate stock gaps along the supply chain even further, and buyers who still need volume will be forced to wait longer than anticipated before new cargoes arrive.

The summer closures in Sweden vary, but notifications from some of the mills indicate a timespan between July 6 until August 3.

In addition to the summer down-time, many of the sawmill inventories have been running on the low side as some March and April contracts were either cancelled or postponed earlier on by buyers and the mills held back from over-producing. When processing starts running again in August, it will still take several weeks of production to yield specifications in any reasonable volumes for shipping, and contracts are unlikely to start arriving until the end of August or early September. This will leave a void in UK inventories for some time to come.

In the Baltic region, temperatures have soared in between rain showers leaving high levels of humidity, and these conditions are inducing more instances of blue sapstain in redwood production than normal. Although this ‘feature’ is generally resisted by UK merchants who prefer every piece of wood to be clean and bright, it must be borne in mind that it is not a structural grading defect in C16/24 and does not warrant a claim or rejection unless actual rot is detected in any of the packs.

Under the current circumstances it is vital to turn stocks over quickly or to pressure treat redwood C16/24 before the packs start sweating under their plastic wrappers if they are left exposed to the elements. Some producers try to mitigate the effects of humidity in export packs by using woven breathable wrappers, while others reduce moisture levels by an extra one or two per cent below the 18% standard during kilning. It is worth mentioning that in the US both the trade and consumers alike are unfazed by blue stain, or even some scattered pinhole in their structural softwood. That is one reason exporters find it economically viable to ship to customers in the US.

Turning to the home-grown industry, producers have seen a rocketing demand for landscaping products, with the production of treated garden sleepers running over a month behind. Some sawmill production has been hampered because residues of wood chips have been piling up in large volumes due to lack of demand from the board producers.

The pandemic lockdown has prevented the OSB manufacturers from operating at any capacity, while the social distancing proximity rules are in force for indoor operations and therefore cannot take sawmill residue for the time being.

Contacts from the domestic producers see the current demand as a main consequence of direct consumer demand, using materials for home and garden improvements during the self-isolation and the furlough period.

As people return to work or, in fact, face redundancy from company closures or cutbacks, there is a concern that the effects of the plunge in UK GDP will rein in peoples’ spending power. If the current increase in demand is a “bubble” of activity, then when it bursts the trade will return to its dependency on the normal markets of construction and housebuilding.

The current trend in some ways mirrors the difficulties experienced by the softwood trade around the time of 2007-2008 when softwood supply at the merchants’ yards became depleted to such an extent that importers turned to Canadian producers for supply.

Canadian producers diverted volume to the UK and imports rocketed. Once the timber began to flow and merchants’ stocks were replete, the market price fell sharply because the real underlying end-user demand was weaker than perceived.

Having just scraped through 2019, the last thing the UK trade needs now is for the big Scandinavian producers to return from the holidays and blast too much volume through their mills. What is required is a measured production in line with a longer-term forecast of demand so that some stability can become established. Stronger demand from other markets should help that to happen.

In the structural engineered wood sector, UK demand for I-beams is said to be slow and mainly driven by the completion of part-built houses rather than new starts. The demand is likely to remain uncertain in the shorter-term as developers wait to gauge the effects on the market of a tide of rising unemployment. The government’s call to build the UK economy out of potential post Covid-19 recession and sweep away red tape is an encouraging message, but the building industry will need to see the rhetoric translated into action beyond the media headlines.

The boom or bust merry-go-round which has wrong-footed the importing trade so many times over the past decades, has created inefficiencies in finance and resources right along the supply chain. Either the market is over-stocked or there is an acute shortage. Once the industry resumes trading for the rest of 2020, specifiers and users will need the confidence that global supply can achieve a good and reliable balance between supply and demand going forward.

If this cannot be achieved in the longer-term, then more solid softwood volume will continue to be lost to composites, engineered wood products and competing materials.