Subdued mood amongst hardwood traders at Interzum

May 25, 2023
  • text size

The general mood of hardwood traders attending the Interzum 2023 show in Cologne 9 to 12 May was that the overall market, having slowed dramatically in the second half of 2022, has remained very subdued this year.

There were many references to economic uncertainty owing to the Ukraine war, extremely high energy costs, rising inflation leading in turn to higher interest rates, and consumers becoming increasingly cautious after two years of high spending immediately after lockdowns.

The boom in home improvement, that started in the pandemic and helped drive hardwood sales in Europe and which was encouraged by government stimulus measures, is now well and truly over.

This informal view chimes with the formal economic analysis of organistions like the IMF whose latest Regional Economic Outlook report for Europe published in April notes that “Europe faces the difficult task of simultaneously bringing down inflation, sustaining economic growth and preserving financial stability as it grapples with the fallout of the energy crisis triggered by Russia’s invasion of Ukraine and the aftermath of the COVID-19 pandemic. While declining, inflation remains very high and growth has tumbled since the middle of last year as inflation lowered households’ real incomes”.

Many hardwood importers in Europe were caught out by the sharp fall in prices for some hardwood products, including from South East Asia and North America and for lower grades of European hardwood, starting from the summer of last year.

The price drop was driven by the sharp fall in global demand last year as all the major economies, including the US, China and Europe, suffered a downturn.

The global freight rate index (as reported by Statista) fell from a high of US$10,361 for a 40 ft container in September 2021 to US$2,119 in December 2022. On some routes the fall was even greater, for example one UK importer of Asian plywood said the fall from South East Asia into the UK fell from a high of US$18,000 to just US$1,800 during this period.

As prices fell on global markets, hardwood importers in Europe that had bought heavily in the first half of 2022 found that they were now carrying a lot of overpriced stock that was increasingly difficult to sell. Over the last six months, importers have been slowly offloading that stock, frequently at a loss, to maintain cashflow.

While that is the general picture, the situation has varied widely throughout the hardwood trade in Europe and dependent on the species and end-sectors involved. The problems of high stocks of overvalued products particularly apply, in the case of tropical hardwoods, to Indonesian products including bangkirai decking and laminated window scantlings and in the case of temperate woods, to American hardwood and flooring grades of European oak.

In the case of African sawn hardwood, although prices for existing landed stock in Europe have been falling as large volumes arrived last year and consumption has been slow, availability for forward orders from African sawmills in the second half of this year is restricted and prices are firm and expected to remain so. This reflects rising overheads for African producers, driven by fuel and energy inflation, which is resulting in falling output.

An increase in Cameroon’s export tax from 10 to 15% on the FOB value of sawn timber has also contributed to firmer prices for forward orders.

After all the work carried out on garden improvement during the pandemic, the European market for tropical hardwood decking has now slowed to a crawl. European importers are carrying heavy stocks bought at high prices last year and are not in the market for new supplies.

With demand so weak, exporters in Malaysia and Indonesian have struggled in their efforts to push for higher FOB prices in response to lower harvesting and production volumes.

The volatility in prices for American hardwoods in the last two years months has impacted on demand for those tropical species where there is direct competition. The most obvious overlap is in the market for tropical species like ayous, okoume and abura/bahia which compete directly with American tulipwood for interior joinery and furniture applications.

Prices for American tulipwood rose sharply between 2020 and early 2022, but then fell sharply from the middle of last year. Ready availability of the American species at low prices is now acting as a further drag on demand for the tropical timbers in Europe.

The extent to which applications for American hardwoods and tropical hardwoods overlap in the European market is increasing as production volumes of thermally modified American hardwoods suitable for external applications continue to rise. Ash was formerly preferred for thermal modification, but with production volumes of that species declining sharply due to the Emerald Ash Borer infestation in the U.S., attention has now switched to red oak and tulipwood.

According to reports from traders at Interzum, the European market for wood furniture and flooring is particularly slow. There were some positive reports of reasonable activity in the windows and doors sectors in parts of the continent.

Overall anxiety about future prospects seems particularly pronounced in Germany and in some central European countries most directly affected by the war in Ukraine. Some more positive reports came from traders operating in Italy, Spain, France, the Netherlands, and Ireland. Reports from the UK were very mixed, the overall impression being of a very slow start to the year but with rising optimism that the worst of the downturn is already over.

Gaps are beginning to appear in UK stocks and more importers are taking steps to fill these. This mirrors wider economic data.

On a positive note, the IMF Regional Economic Outlook report notes that an all-out recession was avoided in Europe this winter thanks to sharply lower energy prices and government relief measures.

The expectation is that the continent’s economy will continue to grow at the slow pace of 0.7% this year, rising to 1.4% in 2024 due to “gradually easing headwinds” with lower energy prices, easing supply bottlenecks, improving household purchasing power, and “some unwinding of the tightening of financial conditions later next year”.

This year GDP is forecast to grow by 1.5% in Spain, by 1% in the Netherlands, by 0.7% in Italy and France, and by 5.6% in Ireland. However, GDP in Germany and the UK is expected to decline this year, by 0.1% and 0.3% respectively.