Riding the crest of the wave: Sawn softwood markets in 2003-2004

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The trend towards the globalization of the production, consumption, and trade of sawn softwood continues unabated in 2003 and 2004, as oversupply, fierce competitive pressures, and global currency rates remain the formative themes in shaping the import and export patterns of sawn softwood products.

UNECE characterizes the global sawn softwood marketplace in 2003 and 2004 as one that is "riding the crest of the wave". Markets were generally positive in 2003, and growing demand for wood products resulting from robust housing activity in various parts of the world kept prices relatively buoyant in those markets.

In general, sawn softwood prices increased, especially in North American markets, as rising demand, coupled with a weakening US dollar, began to exhaust available capacity.

Sawn softwood markets in North America were strong in the first half of 2004, driven largely by a boom in home construction. Almost three years of low interest rates for short-term funds and, consequently, low cost mortgages, spurred activity in US single-family home construction, as well as in home repair and remodelling.

On the supply side, 2004 shipments were hindered by the inability of railroads to provide enough cars to meet demand. Even with railcar loadings up 8% in the US and 6% in Canada, the available transport capacity was below needs.This delayed shipments and discouraged some production in both the US and Canada and raised shipping costs. Consequently, US imports of sawn softwood products (especially from European producers) reached an all time high in the first quarter of 2004, up 35% over the same period in 2003.

Whilst non-tariff barriers of wood products exported from North America to Europe continue in the form of phytosanitary restrictions, it is the ongoing dispute over Canadian sawnwood exports into the US that has most affected international trade in sawn softwood.

Further, the weakness of the US dollar, which fell from a high of CDN $1.60 in 2002 to as low as CDN $1.30 in early 2004, reduced returns for Canadian suppliers and dampened their incentive to sell to US markets. Initially, Canadian market share fell in the early months of 2003 until significantly higher prices restored their incentives. By May 2004, prices for commodity sawnwood spruce-pine-fir from Canada, pine from the US south, and Douglas fir-hemlock from the US west neared historical highs, which spurred imports.

Lastly, it is worth noting trends in two key markets that, while not part of the UNECE region, continue to have significant impacts on production, consumption and exports of sawn softwood products - China and Japan. Unlike other importing regions of the world, China?s demand for commodity sawn softwood products keeps rising rapidly (and is expected to continue), although consumption is still currently dominated by hardwoods. This provides increasing market opportunities for exporters of both sawn softwood products and raw logs to feed domestic production.

In Japan, 2003 saw increases in the demand for sawn softwood for the first time since that country's economic bubble burst some 10 years ago. While the 2003 levels of almost 24 million m3 of consumption are not anywhere near the levels of 36 million m3 seen in 1995, they do represent a marked improvement over 2002. That said, this increase is expected to slow down modestly in 2004. Interestingly, this is not expected to have a significant impact on European exports of sawn softwood to Japan, which reached record levels of over 2.7 million m3 in 2003.

In 2003, as in the past, much of the sawn softwood trade in Europe occurred within the continent. However, while trade in the EU/EFTA subregion is generally best described as being fairly dynamic, 2003 was characterized by a remarkable consistency, as well as some optimism despite fluctuations in sawn softwood prices, global exchange rates and inventories.

In the EU/EFTA subregion, sawn softwood production increased by 2.2% in 2003 over 2002 and was more than matched by a 4.8% growth in apparent consumption. In addition, the value of exports gained nearly 18% over the same period, while export volumes remained steady in 2003. Western European companies are quickly beginning to realize that they must compete against lower cost commodity producers in the Baltic countries and other countries in central and eastern Europe by adopting value-added and niche marketing strategies, increasing capital expenditures to improve mill efficiencies, and exploring new, untapped market opportunities.

In particular, Nordic producers have witnessed a banner year. Production of sawn softwood in Sweden was up 3.9% in 2003, nearing record levels of 17 million m3, with profitability of Swedish sawmills estimated to have increased by between 3% and 4% for the second year. This was in spite of intense competition from Russian and Baltic producers in traditional markets like the United Kingdom, Germany and the Netherlands, and significant erosion of market share in other regions of the world such as North Africa. For the time being, Swedish wood producers are concentrating their efforts on the UK, largely as a result of the Sterling's strengthening relative to the Swedish krona.

Finland also made impressive production gains of 2.7% in 2003. However, while production continues to grow, forest industry profitability is on the decline, owing largely to a sector-wide 7% average drop in prices.

Consumption of sawn softwood products in the Other Europe subregion continues to move upwards, hitting a record high of almost 14.5 million m3 in 2003 (+3.1% over 2002). Production of sawn softwood in 2003 increased by 4.8% overall in spite of negative to marginal growth by the top three producers, the Czech Republic, Latvia and Turkey (in order of decreasing production). The fourth largest producer in this subregion, Poland, has gone from production decreases of 6.0% in 2002 to production increases of 4.9% in 2003, although they are still well below their pre-2001 levels. Export levels of sawn softwood from the central and eastern European countries, which have been relatively consistent over the past five years, grew substantially by 8.9% in 2003 (mostly trade to the EU15).

The most impressive gains were seen in the two largest exporting nations, Latvia (+13.9%) and Romania (+26.3%), in part benefiting from government policies to liberalize foreign investment.

In general, industry performance in the central and eastern European subregion is buoyant, thanks largely to decent infrastructures, plentiful timber supplies being harvested in increasing volumes, proximity to markets (with most of the exports being sold into the EU), and relatively stable political and economic climates. In the Baltics, production continues to be more concentrated and consolidated as a result of increased foreign investment, expanded capacities and modernized mills, especially in Estonia and Latvia.

In addition to the Baltics, increased investments are also prevalent in other central and eastern European countries, which also continue to benefit from lower labour rates, liberal trade restrictions and accession to the EU. In short, countries in the Other Europe subregion are fast becoming formidable competitors in the sawn softwood arena. In particular, Sweden and Finland are feeling competitive pressures from producers in these regions, as some of their traditional export markets begin to source more and more wood products from eastern Europe.

In 2003, the total output of sawn softwood produced in the CIS region was up by 5.2% over the previous year, totalling over 20 million m3 for the first time since 2000. Of this total volume, Russia accounted for over 17 million m3. While comparatively small, volume outputs from Belarus and Ukraine are also on the rise, both with impressive doubledigit gains in exports (+34.0% and +19.2%, respectively). Russian exports continued to rise strongly in 2003, by over 18%, reaching more than 10 million m3. In 2003, the major importers of sawn softwood from Russia were: Egypt (12.0%), Japan (8.0%), UK (7.2%), Germany (5.2%), China (4.8%) and Italy (4.4%).

Among all of the sawnwood trade flows in the UNECE region, exports from CIS countries to non-UNECE region destinations, for example the mideast, Japan and China, have seen the most rapid changes, as shown in the sawn softwood trade flows. According to preliminary forecasts, this surge in production and exports is expected to continue into 2004.

Overall, both production and consumption of sawn softwood in North America decreased marginally in 2003 (-0.5% and -0.6%, respectively). Modest increases in production were observed in the US (+0.5%), while Canada saw a net reduction (-1.5%). That said, the volume of sawn softwood exports from the US decreased by 1.0% over 2002, while Canadian exports continue to grow (+1.7% in 2003). This implies that it was mainly production from North American manufacturers that met the increased demand in the US in 2003. Other offshore imports fell by 3%, reflecting the weakness of the US dollar. A strong Canadian dollar also hampered Canadian exports in the first quarter of 2003, but these strengthened as prices rose in the latter part of the year.

Looking ahead, the US economy is in the upward phase of a business cycle. With the current revival of previously lagging sectors (e.g. non-residential construction and manufacturing), inflation pressures are also increasing. Currently, the extraordinarily low interest rate environment is ending, as the US Federal Reserve began to raise lending rates in June 2004. Accordingly, the prospects for home construction are also beginning to change.

Two other occurrences in the North American sawn softwood marketplace that will have far reaching impacts are worth noting. First, a US ban on chromated copper arsenate preservative (CCA) in sawnwood for residential applications went into effect at the end of 2003. The available alternatives, mainly copper-based solutions, pose new challenges to US wood treaters with respect to meeting the demand for durable wood that does not corrode metal fasteners during the active service lives of the products in place.

Second, in the major Canadian sawn softwood producing province of British Columbia, the mountain pine beetle problem has reached epidemic proportions. Estimates for 2003 put the area of coniferous forests that have been infested at an astounding 4.2 million hectares.

The short-term outlook for sawn softwood production, consumption and trade will be affected by three main factors: global exchange rates, sawn softwood prices and the ongoing trade dispute between the US and Canada.

The course of exchange rates hinges largely on the US dollar, which has been weak because of the large current account deficits and low interest rates. A weaker US dollar hinders imports, which, in turn, bolsters domestic prices. In the meantime, a strong euro in early 2004 was already expected to slow US imports of whitewood (spruce and fir) from northern Europe, but the ensuing price boom offset its negative effects and European exports to the US in the first four months of 2004 actually recovered by 39% after falling off in 2003.

The second element affecting the outlook of sawn softwood dynamics is the supply response to the highly favourable prices experienced since the second half of 2003. Preliminary surveys indicate that US mills have increased capacity by 4% relative to 2002.

Planned capacity additions in Canada and Europe for several new or expanded mills suggest that similar increases are also taking place in those regions. With the eventual rebalancing of railroad capacity in the US, supply flow increases are likely to follow. Based on past experience, they could exceed demand and upend the current upbeat prices. The interplay of possibly lower housing demand and increased supply on the one hand, versus a weaker dollar discouraging imports on the other, will set the stage for market forces in 2004 and 2005. Higher prices could still prevail through the first quarter of 2005, followed thereafter by a return to more normal pricing.http://www.unece.org/trade/timber/docs/fpama/2004/fpama2004a.htm
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