Eroding Markets Point to Sawmill Curtailments in Europe
(First published in: Spar Tree Group’s October newsletter, View from the Stump)
The mood at the 70th International Softwood Conference (ISC) held this year in Copenhagen was one of caution and concern. With global markets cooling off and many producing countries in Europe struggling with exceedingly high log and energy costs, some sawmillers expect losses – and increasing losses – for the rest of fourth quarter as well as first quarter in 2023. With too much production already evident in the market, European mills are not yet slowing down enough despite all the red flags of shrinking demand already evident. This means that more European sawmill curtailments will occur in the short-term.
Russ Taylor has been a regular attendee to the ISC since its move to an international event starting in 2006 and he is normally the only representative from Western Canada (aside from Don Kayne, CEO, Canfor, who presents each year by ZOOM with some in-person presentations).
Europe is seeing the highest interest rates in 30 years, and for the US, it is 40 years. The so-called “yield curve” is now running negative and increasing – always a sign of a pending recession. Most economists are now forecasting a global recession in 2023 with Europe starting earlier with the potential of a hard landing. Soaring energy costs, rising inflation and interest rates caused by the Russia-Ukraine war are creating difficult conditions for consumers and producers. While high interest rates and inflation are all over the world, it is anticipated that the US recession could result more in a soft landing. However, the US Federal Reserve is expected to further raise interest rates and that could prolong the time before any economic recovery.
Softwood lumber consumption in European ISC countries was a healthy 82.9 million m3 in 2021 and is estimated to ease to 78.9 million m3 in 2022. The official forecast for 2023 is for a small reduction to 77.5 million m3, but this outlook seems overly optimistic when speaking with many of the 200 delegates. With the expectation of rising unemployment, high interest rates, high energy costs and so much uncertainty with geo-politics, the outlook for 2023 is not looking good at all for European sawmills.
European sawmills have been facing soaring delivered log costs due to the surging prices for fire and pulp logs – up to €95/m3 (~US$95/m3) – which had pushed sawlog prices in some countries to €150/m3 (~US$150/m3). With lumber prices now falling, sawmills in some countries are being squeezed into negative sawmilling margins. Fortunately, fire and pulp wood prices have peaked and should ease, so that may provide some much-needed relief on sawlog prices in fourth quarter.
In the short term, however, lumber consumption and consumer confidence are falling, and consumers’ disposable income is being redirected towards paying higher energy, food and, in more and more cases, mortgage payments. This makes business in Europe very unpredictable going forward. European lumber production in the ISC member countries is likely to drop from 97.2 million m3 achieved in 2021 to an estimated 94.7 million m3 in 2022 and a forecasted 93.5 million m3 for 2023 (although this seems very bullish given the tone of the conference).
European lumber producers are also facing a potential nightmare scenario from the proposed EU Deforestation Regulation. Once it has come into effect in the next 1-2 years, all business activities must be “deforestation-free” – which requires extensive documentation. If implemented, it could seriously restrict the harvesting of some forests, reducing the log supply in various countries in Europe.
Presentations on other export markets outlined slowing markets in China (from COVID lockdowns and a weak property market), high inventories in Japan were not encouraging, and ME-NA markets were slow. For European lumber exporters, many are still relying on the US market as outlet for volume, especially with a weakening Euro and easing ocean freight rates. In fact, only the US market was considered a feasible export market, given the steadier demand and the volume potential. So far in 2022, European exports to the US have increased by 13% over the same period in 2021, led by Germany and Sweden. European lumber now represents 13% of total US lumber imports and I see this market share growing, given the flat to declining production from Canada.
Russian softwood lumber production is slowing as the full bite of the sanctions have kicked in the second half of the year. Russia is cut off from 60% of global markets and will have to rely on China as its main market as well as some other Asian markets (especially Japan), CIS countries, and the ME-NA markets. However, logistics costs to markets, especially from Northwest Russia, are expected to restrict Russia lumber and birch plywood exports significantly. Russian exports were 27.6 million m3 in 2021 and are estimated at 22 million m3 for 2022, with the bulk of the decline occurring in the second half of 2022.
On a more positive note, some of the potential “global” market opportunities for European sawmills can consider the ongoing and steady home building in the US, increased repair and remodelling activity in Europe, and demand for building materials to rebuild Ukraine. As building with wood is now widely being accepted by governments and investors as way to store carbon and positively impact climate change, further gains can be expected in “green building” in the mid to long-term, but not so much in the short-term. Consequently, it will get a lot more difficult for European sawmillers before it gets any better.
First published in: Spar Tree Group’s newsletter, View from the Stump. This newsletter provides strategic and thoughtful analysis on the BC forest industry and beyond, along with incisive editorial views. Subscriptions are available at: https://www.spartreegroup.com/view-from-the-stump or contact David Elstone at email@example.com