Swedes pin hopes on spring recovery

Summary
• From January to July, Swedish mills’ production was 1% down on the year.
• Log prices remain high.
• North African and Middle Eastern markets are recovering.
• Production curtailments are expected.
• UK buyers have become very cautious.

The Swedish timber industry finds itself in a similar position to this time last year, with raw material prices and sawn timber prices poles apart, and overproduction throughout Europe stimulating plans for production cuts, but this year the current economic uncertainty is an added complication.

“We are pretty much where we were last year but the difference is that last year there was a sense that the worst times had past – now we have this economic turbulence,” one shipper told TTJ.

While the timber industry faced low demand and an economic crisis in 2008, factors for Sweden have changed since then. “In 2008 Swedish mills remained competitive due to the krona and favourable raw material prices but all that has changed,” said a shipper. “The krona is back to normal levels and the raw material price has been going up dramatically. Sweden no longer has a free competitive advantage.”

Prospects

The latest economic crisis comes at the end of an already tough year for many, although not all, Swedish producers, leaving some traders feeling pessimistic about prospects through to next spring, at least.

“This is going to be the worst year in our history; even 2008, which was a disaster year, was better,” one told TTJ. “And it doesn’t look very optimistic for the next six months.”

Others agreed. “We think we’re in for a long period of difficulty,” said another producer.

With the seasonal slowdown on the horizon one shipper said he was busy trying to make business. “We’re trying to fill our boots now and make business for the short period that remains of the year,” he said.

The biggest problem, he added, was that his company was running on very weak profitability.

It was a problem echoed by others, and one went as far as to say “most mills in Sweden are losing money”.

However, one sawmiller was keen to point out that 2011 was by no means a disaster for his company, whose financial results were still in the black.

Costs and prices

But there is no doubt that there are pressures on the industry, largely the result of the continuing gap between high log costs, especially in south Sweden, and sawn timber prices, and oversupply is not helping. “The comparison between log prices and sales prices has never been so wrong,” said one shipper.

Eight mills have closed in Sweden this year but Södra and Holmen’s new mills have countered any easing in log supply.

Production curtailments

Everyone agrees that European production has to be reduced and Swedish mills are likely to make decisions over the next few weeks, although those with log stocks may be forced to cut in order to generate cash flow.

The latest figures from Skogsindustrierner show that Swedish mills produced 9.6 million m³ of sawn softwood from January to July this year, which is about 1% below last year. Output in July was down 13% on the year to 640,000m³.

One contact estimated that the large European suppliers, including Russia, were producing around 5% more than last year and he felt that Finnish mills’ output, in particular, was too high. “Finnish mills are the most aggressive in the market and have been for a while. They’ve had a strong increase in production for the last two years; they’re a little high in inventory and are pushing quite strongly,” he said.

If European production wasn’t curtailed quickly, said another shipper, he feared that winter would be difficult, adding that any cut in output would take a while to filter through.

Global markets

In terms of demand, some countries had been performing reasonably well until the latest slide in the global economy.

“Some markets had clearly improved since last year but no market in the world is overperforming; even those that have improved are far from normal levels,” said a contact. And, unlike in the 2008 financial crisis, many governments lacked the money to stimulate the economy so there was “no hope that demand will improve in the near future”, he said.

Until recently, demand had held up in France and Germany, and mills report some recovery in north Africa and the Middle East, except Libya.

Until stable governments were established in those countries affected by recent uprisings there would be no infrastructure development or encouragement for foreign investors but the “underlying need” for materials was enormous, said another contact.

UK market

The UK remains one of the toughest markets: a small uplift in demand earlier in the year was lost in late summer and now buyers have moved into “a very cautious mode”.

Having said that, one contact was pleasantly surprised that his shipment figures for September were better than anticipated, although he conceded that “we’re not breaking any records”.

However, all acknowledged that UK customers are buying short term. “Historically our customers could buy a quarterly volume because even if they didn’t have full order books they knew what was coming. Now people buy when they have orders; they’re not speculating,” said one shipper.

Now the trade is hoping that this early slowdown will not be coupled with a repeat of last year’s freezing winter weather. “We don’t know what sort of winter we’re going to have. If we get the sort of snow and ice we had last year, that would be a disaster,” said a contact.

So while Swedish shippers are resigned to a depressed market over the next six months, especially in the UK, and holding out for a spring recovery, one contact was still trying to find the positive. “There’s a bit of a seizure in the trade at the moment, but you have to get on with it. Let’s not forget, we still need wood and we still use wood,” he said.