International Softwood Conference: The current state of the European sawmilling industry

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Marc Kubatta/RS
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ISC Berlin 2014On 16 and 17 October the International Softwood Conference (ISC) was held in Berlin. Worldwide experts analyzed the wood markets around the globe. In the following, you can see the first part of this analysis related to the European lumber markets.

Recovery is not stable after the crisis

Claus Tigges -President of the Regional Office of the Deutsche Bundesbank in Berlin and Brandenburg- presented the financial policy frameworks in which the timber industry will move in the next few months. The recent years were characterized by a rapid recovery from the crisis of 2009, however, this recovery was not stable.Claus Tigges

The largest countries in the Euro zone currently have only a weak, sometimes even a negative growth. On contrast, growth in the former crisis states like Ireland, Spain and Portugal is healthy. Overall, growth lost momentum in the second quarter of this year, and mainly due to the strong first quarter, slowdown overstated.

In the Euro zone a recession is not expected, but rather a slight increase in GDP. However, a risk factor is the geopolitical situation.

Market prospects for European sawmills

Sampsa AuvinenSampsa Auvinen, board member of EOS and CEO of Latvian Norvik Timber Industries, analyzed the market situation for sawmills in 2013 and 2014. 2013 was good for the first 7-9 months, however, a downward trend started since. At the beginning of 2014, lumber production in Europe increased sharply, with the exception of Switzerland. Especially production in Romania grew. At this point, Auvinen spoke with irony of a fatal tendency of sawyers, which make their sawing capacity dependent on roundwood supply. He said: "We have logs, so we saw. We love to cut our logs."

The market research group, Euroconstruct, has predicted a growth for the construction industry of 2% in 2014. For Auvinen this prediction is too optimistic. In construction, the growth will be much lower, he said.

Markets in the Middle East and North Africa will increase in importance for the European sawmills. Exports here will rise, however, there is still a degree of uncertainty caused by the permanent political conflicts.

Auvinen sees the Asian markets, such as Japan and China, as being critical. In Japan, housebuilding hasn't decreased so strongly since 2009. China is still an important market but now is slightly trending downwards. In order to support the building industry, the Chinese government promotes the construction of second apartments. Actually, the housing market in China is saturated, says Auvinen.

Even if the US market is growing slowly, there will be no positive effects for the European markets in the upcoming period.

Despite the Ukrainian crisis, Auvinen expects no reductions in timber trade with Russia. Sanctions imposed by the European Union will not explicitly affect the civilian population. The Russian ruble lost 18% of its value in 2014: that should be rather good for Russian sawmills which can focus on exports. The situation is different with deliveries to Russia, such as conversations with conference participants showed. Investments in Russia are increasingly difficult; money go increasingly in defense and agriculture and banks are less willing to finance investments.

Auvinen's conclusion: Market developments for the European sawmills are hardly foreseeable. Lumber demand is unstable and quarter 4/2014 and 1/2015 will probably become difficult. As a consequence, sawmills may be forced to reduce production.

The view of wood consumers - developments better than expected

Andreas Möller, Chairman of the European Timber Trade Federation ETTF and CEO of wood and paperAndreas von Möller trading company Jacob Jurgensen GmbH & Co. KG in Hamburg, analyzed the current market situation from the timber consumer perspective. It is characterized by a stable gross domestic product in the Euro zone and a stable development in the construction industry.

Construction activity remains high in Germany and Austria. In the UK and Spain a recovery is underway, and also (though at lower levels) in Hungary and Slovenia. Problems are still to be found in Italy, where construction activity continues to decline.

At the same time, I'm looking at building permits, says Möller. In Germany, Austria, Belgium and Great Britain, their number is at high levels. In the Netherlands and Spain was at a low level, but a recovery can be noticed. In France, the number of building permits is dropping, and in Italy continues to decrease despite the already low levels.

Lumber exports of EU countries have declined slightly in recent years and since 2012 by an annual 1%. The main reason is the decrease in exports to fellow EU countries. In the first half of 2014, they were 6% lower compared to the same period of 2013, down to 11.3 million cbm. Deliveries to countries outside the EU, on the other hand, increased by 6%, to 9.5 million cubic meters, mainly to Japan, China and the Middle East. Decreasing exports to these destinations were from Austria and Sweden, and increasing from Finland, Germany, Romania and Latvia.

The decline in EU lumber imports has slowed in 2014. The volume was only 1% lower than the same period of last year. In the previous years, the import volume had decreased by 6%. Especially Germany, Belgium, the Netherlands and Austria have imported less. Against this trend, are imports in Italy, UK, France and Spain, as well as several smaller countries such as the Baltic States, the Czech Republic, Slovakia, Ireland and Croatia.

In his presentation, Andreas Möller sees the future of the European lumber markets better than expected. In 2013, instead of the estimated 7-10%, the decline was of only 6%, and in the 1H/2014 of 1%. Thus, according to Möller, the situation is bottoming out.

For 2015, the expected growth is of 2-3%, however, there are some potential limiting factors such as: the economic slowdown in Germany, the Ukraine crisis and the sanctions against Russia over energy supplies; also a decline in real incomes, unemployment related to the construction industry and a high public debt, are potential disturbing factors.

Möller looks cautiously optimistic at the German market. The prerequisite is a "destocking", ie a reduction in stocks over the winter. The market in France is characterized by a stagnant development. In the Netherlands, the low point for construction activity was reached, and a recovery is expected for 2015.

In Belgium, some good profits were made in 1H/2014, but now the prices are in free fall. During the same period, Spain has recorded a positive GDP after six years of recession.

Denmark is seen by Möller as one of the best current markets in Europe, and we can look positively at the wood consumption in the UK which is forecast to rise by an annual 3-5%. Italy is moving at a low level; improvements are hardly in sight.

Much depends on the 2014/15 winter, says Möller. This raises the question whether it will be cold or mild, and if the wood supply will exceed demand or not. Market participants should have patience in order to avoid overproduction. Confidence in the European markets is slowly increasing and problems might arise from non-European markets.

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