In the short term though, things are described as tough by a number of our sawmilling customers whether they are in carcassing or fencing. Although it has been a good year overall, the final quarter of 2012 is expected to be very difficult for most sawmillers, who in general saw a great first half to the year, but found things slowing in June, and never really recovering as a result of the Olympics, Diamond Jubilee and the generally poor weather. Merchants are carrying less sawn stock with the bigger names struggling to move volume more than the independent specialists. Most of our customers have concluded that for the time being cutting prices will not improve their market share and are therefore throttling back production to match sales, so that stocks of sawn timber are kept under control, although some customers are taking more drastic action than others with production cuts of up to 35% combined with some redundancies. The result is that log prices are under pressure, particularly for the forests more remote from markets, where the resulting delivered price to the customer will be higher after transport costs are factored into the delivered price. Bidders for both standing and roadside log parcels have been fewer and competition has been reduced, although most sales are still being agreed, albeit at reduced prices for the time being. Most customers are currently well bought for the remainder of 2012 and are now buying forward for 2013, and with the memory of last year’s very open winter, plans are being made to cope with the more difficult conditions we can expect from a ‘normal’ winter.
Innovation and diversification are part of the solution according to a number of our customers; whether it is incising of fence posts to achieve preservation levels that allow guaranteed products, or investment in feather edge sawing technology to enter a new area of the fencing sector, both generate more business and produce more demand for round timber from the grower. In addition some customers have been looking further afield for new sawn markets with a north African market now established by one, and French export proving useful to another.
Remaining competitive with imports remains vital to the success of the domestic trade. Current domestic sawn timber production still offers a £15 – 30 / M3 price advantage to merchants over imported material, and some merchants who have been reluctant to move from the traditional imported source of sawn timber are now looking to significantly enter the domestic market with the potential for an extra 150k M3 of import substitution which is more good news for the grower.
In the small roundwood sector panel markets remain resilient despite the uncertain economic situation. Q3 sale prices were marginally down on the previous quarter primarily due to reduced OSB prices affected by reduced building. UK produced board volumes overall remain good stimulated by the Euro exchange rate which is discouraging imported sources of board and hence giving domestic board manufacturers an advantage on the same basis as sawn timber. Pellet manufacturers have been finding things difficult either because of manufacturing problems, or lack of market due to the continuing uncertainty over RHI and one customer has decided to close for a number of months until the situation becomes clearer. This reduction in demand will be more than outweighed by new capacity from the Iggesund CHP, so all in all small roundwood demand should remain good.
So overall the picture is difficult in the short term, but looking positive for 2013. With the recent news that new mortgage applications are finally on the increase, that we have officially come out of recession in Q3 with 1% growth in the economy, along with government policy encouraging the banks to lend to both businesses and individuals there are plenty of positive signs for wood product demand.