Prices rise as demand chases supply

Prices rise as demand chases supply

Les Burrow11/5/21

Since the beginning of December 2020, softwood production has been hampered by extreme winter conditions in northern and eastern Europe while the spread of Covid-19 in the workplace has brought some mills to a standstill. As a result of these factors, supply is running late, and output is below normal capacity. This combination of events will only lead to shortages.

The new year started with positive growth in the value of many commodities. In the energy sector even crude oil, which hit an extreme low, has bounced back by more than 25% while natural gas ascended by some 80%. Copper prices strengthened by almost 50%, and iron ore and precious metals are all showing increased growth.

In the forest products sector, global prices have accelerated and levels in the US have seen spikes where they have doubled. The US is predicted to import around 25 million m3 this year to help feed consumption of more than 81 million m3. Most of this import volume is normally derived from Canada, but shortages of fibre and a shrinking production on the west coast have left the door open for European mills to make further gains into the US, and in particular Swedish producers. Softwood trading has been consistently buoyant since April of last year and has almost seamlessly continued through to the current market. There is a general consensus among traders that the trend will continue well into the foreseeable future, and both shippers and UK importers agree that imported softwood supply is very unlikely to meet demand.

It also now seems inevitable that gaps in specifications will be a common problem during the first half of the year and beyond. In spite of their most concerted efforts to meet the needs of UK buyers, Latvian sawmills have been hard-pressed to produce structural timber because sawlogs have been slow to arrive. Also, cross-border supplies from Belarus and Russia of supplementary rough sawn material for further processing have virtually dried up, and prices are continuously rising. In addition, current reports from Belarus indicate that exports of manufactured products such as MDF and plywood have slowed to a trickle. A number of producers in Latvia have experienced short-delivered log contracts and this is pushing the mills into bidding for fibre on a regular basis to get the supply they need. A lot of mills have found themselves inadvertently squeezed between trying to honour their customers’ orders and being forced into revising their log purchase prices. Ultimately many shippers have been compelled to ask UK buyers to pay more for goods already contracted, or face losses. The situation seems to have reached a stage where agreements are being replaced by continuous re-negotiation.

The weather in northern Europe has been a major factor governing log extraction, with rain-soaked forest access roads preventing machinery from accessing many logging areas during the second half of 2020. This was followed by severe winter conditions at the start of this year with deep snow and ultralow temperatures. Areas critically affected in early 2021 were north central Finland, Russia, Belarus and the Baltic states.

In Latvia, temperatures plummeted to -30° Celsius in January freezing up hydraulics, treatment plants and making machinery such as log feeds unsafe to operate. In some zones there were also power cuts, disrupting kilning operations and heating systems. With temperatures forecast to rise again in early March, there are concerns that a fast thaw could cause widescale floods in the forests.

The Covid-19 pandemic has reached many secluded rural areas all over the Baltic region, and even isolated villages and towns to the east in the Ukraine. Large numbers of the forestry and sawmilling workforce became infected and were forced to isolate, causing both a temporary cessation of log extraction and closure of several mills.

Looking at the strength in demand across the global softwood market, supply appears to be much tighter than the trade initially anticipated. Prices have risen accordingly, and in the UK, kiln dried C24 levels have increased between 64% and 67% since Q1 2020 to a current level which is a record high when translated into sterling.

This surge in the market comes after many painful decades, when softwood virtually stood still compared to many other commodities. The substantial investments in machinery, logistics and forestry that so many companies have made throughout the industry may now finally prove their worth.

TTJ - April2021