The demand prospects for softwood lumber in the medium term are subdued - this was the tenor at the International Softwood Lumber Conference (ISC) last ween in Amsterdam. It was recommended to softwood lumber producers to curb the feed rate of their cutting lines. The cutting behavior in 2015 has mainly been determined by raw material supply and the currency relation. In 2016, demand should return to the focus of attention.
Subdued level in 2015
In 2014, Austria had been the only producer country to be confronted with reclines in production. What was the lowest level in the past 15 years will grow to roughly 8.4 million m³ in 2015 - this is the average value of the past seven years which had been rather weak.Sweden is expected to show the largest production increase of all EOS countries. The volume projected is 17.8 million m³, and in 2016 the annual volume could exceed the 18 million m³-mark. Sweden is profiting from a stable supply and a comparatively weak krone.
Production levels in 2015 - while Sweden gains, Finland loses
EOS president Sampsa J. Auvinen identified Finland to be the country with the biggest output cuts. Production dropped from 10.9 million m³ in 2014 to 10.4 million m³. For 2016, only a minor recovery is expected for Finnish sawmill industry with a projected amount of 10.5 million m³.Again, Europe's biggest sawmilling nation Germany was only represented by one company at the softwood lumber conference. This year's production decline by 400,000 m³ to 20.3 million m³ was announced in the country report. For 2016, German manufacturers' forecasts are optimistic - they are aiming for a total amount of 20.7 million m³.
Demand in MENA region is high - but only in theory
European lumber producers are concerned about their overseas market, the MENA region. A low oil price is dampening local national economies - the construction sector is decreasing. In addition, the political situation is constantly under distress. "If it wasn't for politics, demand would still be very high", the Austrian timber trade representative Carl-Erik Torgersen sums up the situation.Suppliers experience acute problems with the largest MENA customer Egypt. For instance, more than a dozen ships are waiting to be unloaded near Alexandria. Libya's and Algeria's problems are well-known to the Central European exporters. "Up until now, earnings in Algeria have been excessive. Now however, customs authorities apply control measures that are too extreme, asking for dimension tolerances that are just not feasible", honorary EOS president Hans Michael Offner identifies another market impediment.
EOS president Sampsa Auvinen:
EOS president Sampsa Auvinen © EOS
Main problem: oversupply
"Demand for redwood is sharply declining in the MENA region. This is why for Scandinavian countries, selling alternatives for lower quality products are lacking", Offner continues his explanation. But a smiliar analysis applies to Central European production: "If accumulated quantities cannot be accommodated anymore, the only measure left is to reduce the cutting volume." EOS president Auvinen phrased it as follows: "The problem is not demand, it's oversupply. As the European sawmill industry becomes increasingly dependent on volatile, up-and-coming markets, production has to react to demand fluctuations more quickly."Auvinen predicts a slight increase for the European construction sector in 2016, and this might have a suction effect on European demand as well. This year, Europe's softwood lumber consumption will range around 85 million m³. If demand grows linearly with construction activities, this would bring forward an increase to 87 million m³ in 2016.
Italy reports higher GDP, but...
The Italian participants of the softwood lumber conference were not able to raise producers' hopes. They were only able to indicate a projected GDP-rise of +1% expected for 2015, stressing, however, that it was too early to infer a rising demand in the construction sector. They highlighted that a positive development can be observed for public building activities where timber is utilized increasingly. Low stock levels and slightly dropping prices have been two of the defining characteristics of the Italian market in the fall of 2015.Russia is increasingly successful in China
Geographical proximity, long-established trading contacts and the recent currency advantage all work in Russia's favor when it comes to the Chinese market. 43% of Russian softwood lumber volumes went to China in the 1H, which is 4.6 million m³ already. Exports to the MENA region could also be boosted to roughly 1.6 million m³. In total, Russia increased exports in the 1H by 3%, as Slava Bachkov, Ilim Timber, explained to the ISC participants.Even though in total, China saw regressive softwood lumber imports this year, it has to be taken into consideration that overall, the past ten years had brought a fourteenfold increase of the import volume. Offner recognized efforts for reducing CO2 in China. "Increasing timber utilization in the construction sector would be one solution." This is why now, the "European Wood Initiative" could undergo a revival. Recently, the European timber marketing initiative was only accelerated by Scandinavian countries. "There, less effort lead to big accomplishments. Starting 2017, it would be useful to get all EOS countries involved", as Offner put it.
No supercycle ahead
While in 2014, the US delegation had still been very optimistic about 2015, by now this confidence cooled off a little. Even though construction starts are booming, the timber industry is not profiting from apartment block constructions. The classic wooden single-family house has not caught up yet in terms of quantity.This year's demand volumes for (Canadian) softwood lumber in China dampened the US market.
While ten years ago, the US only had three domestic sawmills under the influence of the Chinese market, by now these amount to 40. This is yet another way in which the softwood lumber world is changing.
