The European sawmilling industry had quite a good start in the early 2014. Demand was slowly picking up in most major markets and the supply demand balance was good and prices were increasing which allowed sawmills results to improve. During the second half of the year in 2014 production in Europe started to rise pretty much in all countries. The better results achieved and good availability of raw material were the foundation for the production to start increasing. Unfortunately, the consumption did not increase as much as the production and this lead to an oversupply situation for the European sawmill industry.
The supply demand balance has been very fragile and it does not take many percentage changes in either supply or demand to change the market situation. The production increased in 2014 by 3.3% in the 13 member countries of the European Organisation of the Sawmill Industry (EOS). This is the biggest increase since 2010. The consumption in Europe increased less than one percent during the same year.
Raw material availability for the sawmills has been rather good and this has allowed the production to increase in the past years. Prices for saw logs have become high when the sawn timber prices started to drop but we are seeing saw log prices in some European countries adjust to the new market situation. There have been recently legislative attempts to limit log trade and exports from countries like Ukraine, Romania, and Belorussia. Especially hardwood log exports from Europe to China are affecting local sawmills. Particularly in Belgium and France log exports have lead to closure of sawmills. Although EOS and Europe is supporting free trade we must make sure that our industries remain competitive compared to other WTO members.
I seems that the European construction bottomed in 2013 and that the future is brighter than the past. But the growth during the coming years will remain moderate. According to Eurconstruct forecasts residential construction is expected to grow 1,7% in 2015 and 2,0% in 2016. A slightly worrying thing is that one- and two family building starts are expected to perform worse than starts of new flats. Construction of one and two family dwellings consumes much more wood per unit than construction of flats.
Youth unemployment, government debt levels and economic uncertainty amongst other things will hinder European Economic growth and construction activity. Also, there are factors in the building material supply chain in the countries where activity is picking up, that are not helping growth, such as availability of skilled builders. It is important for the European sawmilling industry to acknowledge these certainties in its home market when planning future capacity investments.
With the European construction activity picking up slowly the EOS and its members are working to increase timber’s share in construction. There has been encouraging development in many European countries in this field. With the risk of lack of professional builders in the coming years, for the wood industry, this could be seen as an argument for wood solutions with its high degree of industrialized production and thus more labor effective process.
The development in the MENA markets has been, mainly due the geopolitical issues, uncertain. The MENA markets remain important for European sawmills but the demand has been volatile. The population in this region is young which is a good foundation for growth of the economies and construction but if there will not be political stability and the economies do not grow the young population will remain frustrated and instability will continue. The potential for this region to become even a more important market for the European sawmills is there, but the geopolitical risks prevail.
The growth in the Chinese construction activity and demand in construction products including sawn timber have created a new big market for European and Russian sawmills since 2007. This development is likely to continue even if there are some medium term corrections in the real estate markets and short-term slowdown in construction. The main driver in construction in China is the move of 250 million rural residents into newly constructed towns and cities over the next dozen years. Recently we have seen a slowdown of construction activity in China but at the same time sawn timber exports from Europe and Russia continued to grow. Softwood sawn timber imports have remained stable but softwood log imports have dropped. It is interesting to see are we seeing a trend where imported sawn softwood will take more market share from sawn timber produced locally from imported logs.
With the devaluation of the Rouble against the Euro it was expected that Russian sawmills would increase production and exports as their competitiveness was improving. Increase of exports to Europe has not, so far, happened with the exception of the UK, Holland and Belgium but even there in relatively small scale. Therefore, the oversupply situation of the European sawmills has not been affected directly by more Russian sawn timber being offered. Nevertheless, more Russian sawn timber has been exported to China, Egypt and Korea and this has increased competition in these markets, also for European sawmills.
Japanese consumption of softwood sawn timber this year is back to 2011 and 2012 levels. The VAT increase last year created a bubble during which the sawn timber imports, construction activity and consumption of building materials increased to abnormally high levels. Unfortunately, the decrease in consumption and imports happened at the same time when production in Europe was increasing which put pressure on prices in Japan when the bubble burst. Going forward in the medium term, I expect the Japanese market to remain fairly stable and there will not be any big growth in construction activity. In the long run the aging population might mean that demand for sawn timber will not be as strong as today.
"The outlook seems cautiously positive
for European sawmills"
The US housing starts have been rising slowly and reaching the 1 million houses. The speed at which the housing starts have been rising has been slower than many forecasts expected and the time it will take to reach the 1,5 million housing starts will be longer than anticipated. Although the demand for sawn timber in the US has been rising steadily, so has the sawn timber production in North America. Like in Europe the supply demand balance has been fragile and we saw the US prices weaken since second half of 2014. Even though the USD strengthened against the Euro, exports from Europe to the US have not really picked up. There have been some hopes that the increase of US demand would help the European oversupply situation but that hasn’t really happened. But it remains to be seen if the European exports to North America will increase in the future. According to some forecasts the import of softwood sawn timber in North America will start to increase as the housing starts will approach the 1,5 million units.
The outlook seems cautiously positive for European sawmills. Provided we will have more or less unchanged European production this year and the over-seas markets won’t deteriorate, we will have, compared to this year, a rather promising scenario for 2016. But if the demand in Europe will not develop positively or export markets start to weaken the industry will face challenging times and the only solution will be to decrease the production. With the supply demand balance being very fragile the adjustments needed are small as long as everybody participates. In the medium and long term I see that the outlook for the European sawmilling industry is rather good with the housing starts improving in Europe and the US, China continuing to build for the people moving from rural areas and hopefully the geopolitical situation stabilizing in the MENA region.