World trade – a complex matter

The sawmill industry has long been globalized, some may say. That cannot be right, the bottom line of last week’s International Softwood Conference in Berlin seems to be. The Atlantic still divides the industry, as two quotes illustrate: Christian Provost of Canadian wood wholesaler Boscus talked about a "good year" in North America and the prospects for 2015 being also "pretty good". Norvik Timber-CEO Sampsa Auvinen, on the other hand, concluded his market report by saying that lumber prices in Europe would remain under pressure as long as the sawmills did not curtail production. To anticipate the conclusion: At the end of the conference, when asked whether the sawmills were really prepared to cut back their output, Auvinen answered: "We have high fixed costs. An output reduction is therefore a difficult decision. I appeal to the industry to prolong maintenance and Christmas holidays. In our own company, we already have our fingers at the handle of the hand brake. If things continue to deteriorate, we will put it on."

Roundwood trade is booming

Answers to the question of roundwood availability will vary from region to region:

The softwood log supply in Europe was surprisingly good in the first half, but it is getting tighter again. Russia – especially in the northwest of the country in the area between Saint Petersburg and Arkhangelsk – has massive supply problems due to weather conditions. At present, only a third of the official annually allowable cut of 700 million sm³ is utilized due to lack of infrastructure. In 2013, Russia harvested 129 million sm³ of softwood logs. The EU hardly benefited from facilitated exports after Russia joined the WTO. And Europe utilizes only 15% of its export quota to Russia – China, however, uses 75%.In Canadian forests, harvest restrictions after the mountain pine beetle infestation in British Columbia are being felt and so are reduced annual cuts in Quebec and Ontario. In the southwestern United States, there is enough Southern Yellow pine roundwood for 20 to 30 new sawmills of a million sm³ log input capacity. But only one is currently being built: Klausner. Now the first shipments of roundwood from the US Southwest are on their way to China. Export to Europe which would make a lot of sense economically is virtually impossible due to phytosanitary requirements.Like Japan, China has placed large portions its forest under protection and is increasingly dependent on imports. In Europe, the export of roundwood to China is viewed increasingly critical. France has seen demonstrations of sawmillers against the sale of logs to East Asia. In response to the problem, the European Organisation of the Sawmill Industry (EOS) calls for compliance with the phytosanitary regulations. Apparently these are partially bypassed in the event of log exports. There are countries where these regulations are handled in a lax manner which drives the wood processing industry onto the barricades.

Building activity will attract settlers

Markets were the focus of this year’s ISC sessions. In the short term, there are new sales opportunities in Belgium, Turkey or – further away – in South Korea and the USA, said Martin Langen of B+L Marktdaten research institute, Bonn/DE. Britain remains an attractive market which is owed to the building incentive program "Help to Buy" and positive labor market prospects. Poland also issued significantly more building permits in the first quarter, but only in the multi-family houses sector which is less interesting in terms of timber construction.
Overproduction of housing is hardly seen anywhere in Europe. In terms of new living space that the demographic development requires, only in France was built “too much” recently. Between 2013 and 2015, however, that growth is expected to decrease by a quarter there, too. With 240,000 new homes per year, Germany keeps pretty much abreast of what population development requires (which is largely determined by migration). In Italy, just over 100,000 homes are built per year when 200,000 would be needed. Also the UK and the Netherlands have some catching up to do on the housing front. Whether this may materialize in actual residential units strongly depends on the prevailing sentiment in these countries’ economies.
In absolute terms, these building markets are nothing compared to China. Last year, 11.5 million dwellings were built there. This is four times the volume of Japan (908,000), Russia (899,000) and the United States (764,000) taken together. The question is how China will continue to develop. Long expects a reduction of residential construction by 8% until 2016.

Sanctions make sawmills lucrative

At present, Russia’s sawmills benefit from an economic paradox, as was shown by a lecture by Slava Bychkov, member of the Ilim Timber management. The sanctions imposed on his country and the economic downturn there are paving the way for increased lumber exports – for three reasons:

The ruble hits record lows. Compared to the US dollar, it lost 25% of its value last year. This makes exports lucrative. Since it does not make much sense to make investments in rubles nowadays, the companies need export earnings.Due to the economic slowdown in the country, domestic demand for lumber decreases.

Recovery in USA slower than expected

The United States was once an important customer for European lumber. Experts largely agreed that the US market is coming back, the only question will be when. The housing market is recovering at a much slower pace than predicted. Analyst Russ Taylor of the International Wood Markets Group expects the future “normal” annual growth rate to level out at around 1.5 million homes. This year, however, will barely see the 1 million mark exceeded. So careful forecasts say that the annual growth rate of 1.5 million should be reached by 2018. In case of economic setbacks there is uncertainty among experts whether this threshold would be reached in this decade at all. What does this mean for European sawmills? From next year onward, softwood lumber exports across the Atlantic should revive significantly. This year, the United States import approximately 800,000 m³ from Europe (out of 20.5 million m³ of total imports). This amount should rise to 2.4 million m³ in 2015 and to 4 million m³ in 2016.
In 2018 – when the normal level of 1.5 million of new dwellings per year has been reached – the United States would have to import 4.8 million m³ from Europe to satisfy their softwood lumber demand. This does not sound bad. A soaring timber economy which Taylor had earlier named "Super-Cycle", however, seems less and less likely to occur.

Maghreb will continue to grow

The Levante is just as big a question mark and an immensely important market alike. Guillaume Hotelin of the wood importing company Comarbois, Casablanca, was cautiously optimistic. Although softwood lumber imports by the Maghreb (Morocco, Algeria, Tunisia, Libya) fell by 7% to 3.36 million m³ last year, they are expected to revive to a constant annual growth of 2-4%. Currently, lumber imports into this region consisted of 65% pine (for windows, doors, interior), 30% spruce (construction) and 5% maritime pine (construction, packaging). The volumes increase on the back of strong economic growth.
In politically stable Morocco, an annual GDP growth of 4-6% is predicted for the time span until 2019. The economy in the politically unstable Libya could even grow by over 25% in 2015 and 2016, provided there will be a calm-down in the country. Lumber suppliers intending to participate in this increase must show presence throughout several years. Short term success is less than likely to be achieved there. Due to its dynamic demographics, Egypt will also become an increasingly important wood market, said Jan-Gustaf Roempke of the ARA Timber trading house with its branch offices in Sweden and Dubai. In 2013, Egypt built 363,000 homes. This figure could well rise to 572,000 by 2020.

EPD – a rather complex matter

The bottom line of a presentation on the Environmental Product Declaration (EPD) held by Stefan Diederichs left the audience wondering. The member of the Hamburg-based Thünen-Institut showcased tools and schemes by which environmental friendliness of wood will be measured in the future. The frustrating thing is: Within the EU alone, there are 18 different standards and calculation schemes. Depending on the market, sawmills will therefore have to adhere to different certificates and labels. These might sometimes have similar names but still vary from country to country. Moreover, they will not be equally binding in all member states. Sooner rather than later, German sawmills will probably be required to produce an EPD for all public projects (according to German standard).

Not so bad in the medium term

Steffen Rathke praised as president of the organizer – the association the German sawmilling and woodworking industry DeSH – for the openness of the participants and the clarity of the messages the speakers got across: "It was clearly shown what kind of corrections currency fluctuations and political crises may entail."
As representative of the Austrian delegation, association president Christoph Kulterer drew a somewhat ambivalent conclusion. The medium-term outlook does not seem so bad. In the short term view of the coming six months, however, Kulterer sees "a greater economic dent" pending. In the long run, Austria will be challenged to further develop the further processing sector and explore new export markets. "Germany and Italy alone will not suffice."