Strengthening demand raises shippers’ hopes

It's much too early for Finnish sawmillers to hang out the bunting but generally they're feeling slightly more positive about business than they have done for some years. Higher prices and improving demand in Asia and North America are lifting their spirits and they're hopeful that they're positive omens for the months ahead.

"Since the economic crash it's been a question of survival. We've had many false starts but now believe there really is an increase in the general consumption of wood, outside Europe at least. We're certainly a lot more optimistic than we were last year and believe this will continue now," one shipper told TTJ.

Although the European market remains flat, all producers will benefit from the improving demand in Asia, where one contact described the market as "booming", and North America. The latter may not have a direct impact on Finnish producers, as it's more an area for central European and Swedish mills, however, the Finns will be able to fill the voids left elsewhere. Already Canadian supplies to China are being diverted to the US, where 1 million housing starts are forecast this year, providing opportunities for other producer countries.

Last year Finland shipped around 150,000m3 to China, making it the country's eighth largest export market for whitewood, and volumes picked up towards the end of the year.

Now Japan is also hungry for timber as it rebuilds after the earthquake and tsunami, and builders are also busy to beat the VAT increase in April next year.

"What is important is that we're talking about really major users of wood products, like the US, so a few percentage points increase means a lot more than two-digit figures in smaller markets, so it's positive," said a shipper. However, in Europe it's a different story.

Construction declined by 5% last year and is expected to fall another 1.6% this year.

"The forecasts don't look even that good anymore, so Europe is going to be pretty bad this year," one contact told TTJ.

Another commented that the most challenging markets could be Scandinavia's domestic markets as housing starts were falling. There is also expected to be little change in UK demand. "I don't think demand in the UK has picked up at all," said a shipper. "Our customers aren't any busier than they were at the end of 2012."

However, despite these flat markets, some shortages are appearing as a result of last year's production curtailments throughout Europe and the rising demand from Asia and North America.

Some of the bigger UK customers were buying further forward than they had for some time but one contact warned it was important for "everybody to wake up and start securing the specifications for the coming months".

"While it's clear that the main suppliers will not abandon the UK completely for other markets, the prospect of say, 20% of potential supply being shifted elsewhere can cause a major shortage in the UK," he said.

He believed it would be a "real challenge" to source machining grade redwood and whitewood during the second quarter. "The logs which produce many of the popular UK sizes have already been, and will be, converted to Japanese lamina sections and other goods, which are in great demand," he said.

He pointed out that although last year the UK was Finland's biggest European market for redwood, it was fourth after Egypt, Algeria and Japan and that other markets' influence on prices could not be ignored.

Prices rising Prices of redwood and whitewood are rising, providing a much-needed boost to Finland's mills, although some have not seen the expected benefits of the euro's strengthening against sterling and the dollar. "For too long timber has been undervalued and by getting demand to meet supply, rather than supply to meet demand, will mean prices will move up to a more sustainable and realistic level for mills," said one sawmiller.

Although this is a welcome development, it's unlikely to motivate mills to increase production until they have the confidence and the log supply to do so.

"Mills will want some sustained improvement in demand before they increase output. People are going to make sure there's some longevity to demand," a shipper said.

Log prices have been rising, and will rise again if mills increase their demand for ra material. Private forest owners are holding on to their trees and the expected flow of log imports from Russia, now that it has joined the World Trade Organisation, has been delayed by bureaucratic problems. The only raw material coming across the border is birch pulpwood which is of little commercial value in Russia.

"If demand goes up buyers won't find any more wood at current prices so we have to get higher prices, there's no question about it," said one contact. "The price we need if we want to increase production, we're not talking about €5; we're talking about maybe 10%." And while prices and demand are moving in the right direction, for the moment, this market shift is not enough to make a significant impact on mills' bottom lines.

"Even with the current and coming increases the mills won't become gold mines and it's still a long way before we break even. As we know from the past, sawmills'

profitability is eroded by the fact that log prices tend to rise in times like this," said a shipper. "However, we're on the right path and trust we're returning to some kind of normality we've not seen for years."

Another contact was less positive, predicting that the global timber market would remain "extremely challenging" unless something even more dramatic happened in Asia or North America.

"The whole global economy is still fragile and we don't really know where this year is going to go. If we look at the stock markets and general economic indicators of different markets, there are mixed messages," he said, but added that this lack of certainty in itself may be a reason for optimism.

"Maybe the positive thing is that we have mixed messages; we don't have only bad messages now," he said.