Download Timber Bulletin 2015

Edition 14 2015
UPM TILHILL
TIMBER BULLETIN
Trends and influences on the UK standing
coniferous timber sales market
UPM TILHILL
Introduction
Welcome to the 14th edition of Tilhill’s Timber Bulletin. As ever we present an in-depth analysis of some of the key
drivers and influences in the timber market from standing timber through to the import of finished products. We look
back to compare our forecasts with what actually occurred and take an informed view on how the market might develop
over the next 12 months.
Last year we forecast a continued growth in the market in terms of pricing and demand. This was based on the positive
forecasts for continued expansion of the UK economy. Whilst these forecasts for the UK economy have been marginally
downgraded, growth has continued to be well ahead of the rest of Europe. The stand-out influence in the recent
downwards shift in the timber market has again come back to currency. The pound has strengthened against the euro
and Swedish kroner (or vice versa, the euro and kroner have weakened) to the extent where imports of sawn timber
have been able to undercut domestic producers. This is after a long period of the currency providing a significant
advantage to UK producers. This has not only impacted on sawn timber imports, but also on our competiveness with
exports, particularly for OSB and paper. Chipboard has remained relatively unaffected as there is less competition for
imports. Biomass, too, has remained unaffected as it has a different set of drivers around capacity to pay.
There are no indicators as yet of any weakening of sterling. However, a number of political factors could play into this,
not least is the UK Government’s commitment to negotiating a better position with Europe and the promised
referendum on continued membership of the EU. On the European side there are clear signs that some of the most
important EU industrial economies are recovering, but there is always the threat in the background of the potential for
a Greek exit of the Eurozone (as at June 2015).
Whilst our forecast log price for 2014 was on target, the forecast looking ahead has had to be modified to take the
currency issue into account. The green log UK price trend graph (Fig. 10) reflects exactly what has happened with a
levelling off at the end of Q3 2014, whilst the forecasts show a downwards trend, even in the best case scenario. There
is no question that 2015 will be a very different year for timber and there is a need to rebase prices for logs and
standing timber to reflect the impact of imports in the period whilst the exchange rate is against us.
Growers have benefited from the long period of strong demand and high prices. From the Forestry Commission’s most
recent published statistics on UK Wood Production and Trade, 2014 Provisional Figures, the shift away from round
timber coming from the state and towards the private sector is more marked than ever with the private sector supplying
some 57% of all softwood harvested in the period.
Despite the downturn in the price processors are able to pay for logs, there is no indication as yet of any cooling in the
standing sales market. Prices have, so far for 2015, remained much as they were in 2014, and demand appears
strong. It is difficult to be certain of the drivers for this, but an active timber market requires buyers to keep contractors
employed. Fencing demand has been strong to the end of May and, as previously mentioned, small round wood for
chip and biomass has held up well against other downwards price movements.
2015 promises to be a challenging year for all in the timber industry. On the one hand
we have currency against us, on the other a strong economy with housing starts at an
8-year high. But for domestic timber the shine has diminished, albeit temporarily. It is
time for a brief period of belt tightening but the future for timber remains bright and
as foresters we are all in it for the longer game.
Peter Whitfield
Timber Operations Director
www.upm-tilhill.com
2
Update of key trend indicators
Economic Indicators
GDP
Fig. 2 illustrates the four year average of the annual GDP
forecast and then ranks them in the order of best
performing country. China is ranked as No. 1 and the
UK ranked No. 3 by country or ranked 4 when the global
average is included.
This year’s Bulletin again starts by reviewing the economic
climate and how it is forecast to change.
Fig. 1 shows the forecast (published 2014) real GDP to
2017 across the major developed and developing
countries of the world and Fig. 2 ranks the average over
that period. Not surprisingly, China and India remain
strong with growth in the Indian economy continuing apace
and China slowing for a period, before returning to high
growth in 2017. Of significance is the comparison between
UK growth and that of the Eurozone.
Fig 2. Four Year Average GDP Ranking
Source: Global Insights et al
8
7
6
In the context of the global average the UK has performed
strongly and is forecast to continue to do so in comparison
with other countries. Following the general election, how the
new government intends to manage the UK economy and
the UK’s relationship with the EU is likely to have a direct
impact on the growth and development of the industry.
5
O
r
d 4
e
r 3
2
1
Fig 1. Global Real GDP % Forecasts
0
China
Source: Global Insights et al
Global
UK
US
Sweden
Russia
Brazil
Germany
Eurozone
Japan
Finland
Average
8
The Value of the Construction Market
7
The best value product from the timber industry is sawn
timber and the largest market is the construction sector.
Fig. 3 is an extract of data from the Spring 2015
Construction Industry Forecast published by the
Construction Products Association (CPA). It charts the
growth of the sector by value of new work, repair and
maintenance, and total value of works.
6
5
4
3
2
1
2014
2015
2016
Russia
India
China
Brazil
Japan
UK
Sweden
Finland
Germany
Eurozone
US
0
Global
%
India
2017
Earlier Bulletins plotted the severe impact on the sector
from the recession and the consequent cuts in public
3
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Update of key trend indicators
expenditure. This chart illustrates the forecast in growth
of the sector from the private side at 32%, with limited
growth from public spending at 8%. The most important
area of growth is in housing with private contracts
forecast to grow by 46% over the period 2013–2018
and public sector housing growing at 33%. RMI in the
private sector is forecast to grow at 23% over the period
but remaining fairly static in the public sector.
strengthens, landed timber price falls. It had been mooted
that the SEK will need to be at the 15 mark and the euro
at the 1.3 mark before prices will become seriously
affected. It does appear that prices did come under
pressure when the euro hit 1.3 and the SEK hit 12. As at
April 2015, the monthly average spot rates were 12.93
for the SEK and 1.39 for the euro, with every indication
the pound will strengthen further. The impact of the strong
pound is therefore largely, if not totally, responsible for the
dip in prices of green logs (Fig. 10) as sawmillers compete
with increasing imports (Fig. 8) and a weakening demand
for home grown timber. Exporters of UK wood products
will also have a tougher time in international markets as
the relative price of their goods rises.
Fig 3. Value of Construction Industry Forecasts
(2011 constant prices)
Source: ONS/CPA
160000
140000
120000
Our sawlog price forecast (Fig. 12) allows for further
adverse movement on foreign exchange. Quantitative
easing in the Eurozone is compounding the problem and
a 50% devaluation of the rouble in 2014 may prove to be
disruptive through 2015.
£ millions
100000
80000
60000
40000
20000
0
2013
2014
Public Sector
2015
Private Sector
2016
2017
2018
Fig 4. Principal Exchange Rates against Sterling
Total Construction
Source: Bank of England
150.0
Fig. 4 indicates our annual review of exchange rate
trends for the main exchange rates that influence the
price of landed timber and therefore the domestic price.
Our forecasts last year for a stronger pound came about
with a universal strengthening of the pound across all
currencies. This trend has continued in all but the US
dollar where a weakening of the pound has occurred,
falling back to levels seen in mid-2013.
140.0
Index Jan 2002 =100
Exchange rates
120.0
110.0
100.0
90.0
80.0
70.0
4
Canadian $
US$
April
Jul
Oct
Jan-15
April
Jul
Oct
Jan-14
April
Jul
Oct
Jan-13
April
Jul
Jan-12
Apr
Oct
Jul
Jan-11
Apr
Oct
Jul
Jan-10
Apr
Krona
Oct
Jul
Jan-09
Apr
Euro
Oct
Jul
Jan-08
Apr
Oct
Jul
Jan-07
Apr
Oct
Jan-06
60.0
Traditionally, the negative correlation between exchange
rates and sawn timber prices indicates that as the pound
www.upm-tilhill.com
130.0
Update of key trend indicators
Other Relevant Indicators
Table 1. Overview of the Economy, March 2015
Source: OBR
% change on a year earlier unless otherwise stated
outturn
Output at Constant Market Prices
forecast
2013
2014
2015
2016
2017
2018
2019
GDP
1.7
2.6
2.5
2.3
2.3
2.3
2.4
GDP levels (2013 = 100)
100
102.6
105.1
107.6
110.1
112.7
115.3
Household Consumption
1.7
2
2.6
2.7
2.5
2.3
2.2
General Government Consumption
-0.3
1.5
0.8
-0.7
-0.9
-0.2
1.5
Business Investment
5.3
6.8
5.1
7.5
6.5
6.4
4.4
General Government Investment
-8.1
7.3
2.3
1.9
1.6
1.5
2.8
CPI
2.6
1.5
0.2
1.2
1.7
1.9
2
Employment (millions)
30
30.7
31.1
31.4
31.5
31.7
31.9
Expenditure Components of GDP
Inflation
Table 1 is the March 2015 overview of the economy by
the Office for Budget Responsibility (OBR).
Fig 5. Real GDP Growth
Source: ONS/OBR
6
When compared with Fig. 1 the OBR take a much more
cautious view on forecasting than the Global Insights
analysts. This data is also more up-to-date than Fig. 1. The
trend for GDP is fairly flat and is based on the coalition
policy assumptions pre-general election. The OBR revised
upwards the 2015/16 forecast due to expectations of real
increases in incomes and lower inflation as a result of lower
oil prices. Fig. 5 highlights the volatility surrounding GDP
with huge swings between the best and worst cases.
5
4
3
2
1
0
-1
-2
2015
2016
2017
best case
5
forecast
2018
2019
worst case
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Update of key trend indicators
Consumption and Production
Wood Products
Imported Sawn Timber
Growth in GDP is a reflection of the rising spending power
of the population and thereby consumption of wood and
wood products.
Fig. 7 illustrates the total cubic metres of sawn softwood
imported into the UK between 2006 and 2014. A more
detailed analysis by country is shown in Figs. 8 and 9.
Fig. 6 is the apparent consumption of wood and wood
products in the UK from 2003 to 2013 published by the
Forestry Commission in their 2014 Forestry Statistics. 2013
saw an increase in apparent consumption of 8.3% over
2012 (2012 being the lowest consumption level in the last
10 years) and remains well below pre-recession levels of
56.7 million m3 wood raw material equivalent (WRME).
2013 saw a reversal in the decline of sawn softwood
imports with a 7% increase and a further increase of 16%
in 2014. The total volume imported in 2014 being 5.928
million m3. Given the strengthening pound against both the
euro and the Swedish krona (Fig. 4) during 2014, coupled
with a rise in consumption (Fig. 6) this increase is
unsurprising. What we cannot see, until data is published
later in 2015, is the effect on consumption of UK
production. The feeling in the industry is the UK contribution
is holding its own in absolute volume (40.2% in 2013 at
3.581 million m3) but slipping back in percentage
contribution. While the pound remains strong against these
currencies, imports are likely to increase and continue to
dominate the market with prices responding accordingly.
UK production increased by 6.93% and net imports by
8.8%. Domestic production being 23% of total wood
products consumption. The quantum of imports has the
greatest impact on consumption but the growth in UK
production, when imports are rising, is a testament to the
improved market share and quality of the UK processors.
Fig 6. Wood and Wood Products
Fig 7. Sawn Timber Imports m3 and UK Sawn Timber
Production
Source: Timbertrends/FC statistics
Source: Forestry Commission statistics 2014
60
9000
50
8000
7000
6000
30
5000
000's
m m3 wrme ub
40
4000
20
3000
10
2000
1000
UK production
www.upm-tilhill.com
Imports
Exports
0
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
0
2006
2007
2008
2009
Imports
Apparent Consumption
6
2010
UK production
2011
2012
2013
2014
Update of key trend indicators
Figs. 7a and 7b illustrate how importers are affected by
exchange rates. The charts plot the average annual spot
price rates against the annual imported volume of sawn
softwood timber (Fig. 8). The positive correlations are
clearly seen.
Fig 7b. Imports from Eurozone vs Exchange Rate
Source: Source: Timberlands and B of E
3500
3000
000’s m3
Source: Timberlands and B of E
Exchange rate
2500
Fig 7a. Swedish Imports vs Exchange Rate
2000
1500
3000
1000
2500
500
2000
0
1500
1000
0
2003
2004
2005
2006
2007
sek vol
2008
2009
2010
2011
2012
2013
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
euro exchange
In the case of the euro volumes these are the Finnish and
Latvian imports which account for the major importers
from the Eurozone. The severe dip in imports from the
Eurozone through the five years of the recession is due to
both exchange rates and a stagnant economy.
500
2002
2003
euro vol
Exchange rate
000’s m3
2002
2014
sek exchange
7
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Update of key trend indicators
Changes in Sawn Timber Imports
Sawn Timber Imports into the UK
Despite the significant increase in imported volumes from
Sweden its market share has dropped marginally together
with Finland as a result of other importers gaining a
greater share by increasing volumes shipped (Fig. 9).
As discussed in Fig. 7, imports in 2014 increased by
16.3% to 5.928 million m3. Sweden, with stocks at a
10-year high, increased imports by 13.4% to 2.62 million
m3 from 2.31 million m3 in 2013. Other importers again
show significant percentage increases. For example,
Latvia +20.7%, Finland +14.7% and Russia +23.3%.
The minor importers also increased significantly in
relative terms but the quantities are insignificant.
Fig 9. Imports of Sawn Softwood Market Share
Source: Timbertrends
44.2%
45.6%
46.3%
32.8%
34.6%
2622
2500
32.0%
40.0%
3000
37.6%
50.0%
Source: Timbertrends
43.1%
44.5%
Fig 8. Imported Sawn Softwood
49.0%
53.2%
60.0%
30.0%
20.0%
1500
10.0%
774
888
1000
0
Sweden
Finland
Latvia
Russia
Germany
Estonia
Ireland
Canada
Others
Main Exporters to UK
2004
2005
2006
2007
www.upm-tilhill.com
2008
2009
2010
2011
2012
2013
2005
Sweden
58
141
339
2004
307
434
0.0%
500
365
000’s m3
2000
2014
8
2006
Finland
2007
Latvia
Russia
2008
Germany
2009
Estonia
2010
Ireland
2011
2012
Canada
Others
2013
2014
Update of key trend indicators
Forecasts and Price Development
Private Sector Green Log UK Price Trend
2014. A direct comparison with the green log price in
Fig. 10 is not possible as data is collated over different
time periods and a different mix of quality.
Fig. 10 plots a mean GB green log price from a
representative sample of the private sector across most
markets. The chart plots the mean log price trend and the
individual mill variants. The range in price indices data
points is as a result of size (dbh), length and location.
During 2014, the average price rose by 13.6% over 2013,
peaking in Q3 after a sustained and significant rise from
2009. Early prices in 2015 however show a weakening
trend with most mills reducing prices. As can be seen from
our log price forecast in Fig. 12, we expect this trend
to continue as UK grown timber is in stiff competition
with imported Scandinavian timber and severely
disadvantaged by the strong pound (Figs. 4, 7 and 8).
Fig 11. Forest Enterprise Price Index for GB
Source: Forestry Commission
Sep 2011 = 100
200.0
£25.00
180.0
Softwood sawlog index real (LHS)
160.0
£20.00
Fisher Index Coniferous Standing Sales (LHS)
Real av price standing sales (RHS)
140.0
£15.00
£/m3
Index
120.0
100.0
£10.00
80.0
60.0
Fig 10. Green Log UK Price Trend
£5.00
40.0
Source: Forest Industry
20.0
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Mar-14
Sep-14
Mar-15
Mar-10
Mar-11
Sep-10
Mar-09
Sep-09
Mar-08
Sep-08
Mar-07
Sep-07
Mar-06
Sep-06
Mar-05
Sep-05
Mar-04
Sep-04
Mar-03
Sep-03
Mar-02
Sep-02
Mar-01
Sep-01
Mar-00
Sep-00
Mar-99
Sep-99
Mar-98
Sep-98
Mar-97
Sep-97
£0.00
Sep-96
0
170.00
160.00
Log price forecast
150.00
140.00
Fig. 12 is the Tilhill ‘standard log’ forecast which tracks
the changes in price of all the products produced from
converting round logs. Our 2014 forecast was on the
optimistic side with a best case forecast of 8% and worst
case 4.2%, whereas growth achieved a mean of 5.4%.
Looking forward, we believe that the impact of a strong
pound (Fig. 4) and stiff competition from imports,
coupled with a weak demand for home grown timber,
will see UK log prices fall by at best 6% and at worst
14% for 2015, with a best case steady recovery
thereafter back to 2014 prices by 2017.
130.00
120.00
110.00
100.00
90.00
80.00
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
Q3
Q1
2006
2006
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2015
State Sector Log and Standing Sales Index
Fig. 11 shows the most recent published data for standing
sales and softwood log indices. The standing sales index
measures the average price movement over a 12-month
period, with the March 2015 index recording a 17.8%
real increase in prices from March 2014. The softwood
sawlog price is calculated for separate six-month periods.
The sawlog index was 7.5% higher in real terms in the
6 months to March 2015 compared with the
corresponding period of the previous year. The average
price for standing sales was £18.48 per cubic metre over
bark standing in nominal terms an increase from £15.62
in the year to March 2014. The average price for
softwood log sales, at roadside, was £49.55 per cubic
metre over bark, in nominal terms, in the 6 month period
to March 2015 an increase from £44.06 in the 6 months
to September 2014 and £45.45 in the 6 months to March
Fig 12. Standard Softwood Log Price Forecast
Source: Forest Industry
220.0
Index
200.0
180.0
160.0
140.0
120.0
100.0
2003
2004
2005
2006
2007
2008
Worst case
9
2009
2010
Best case
2011
2012
2013
2014
2015
2016
2017
Actual
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Update of key trend indicators
SRW Price Forecast
Standing Sales Price Forecast
The SRW forecast (Fig. 13) is an amalgam of the SRW
products purchased in the UK and weighted by
consumption in the paper and board markets. Our
forecast for 2014 was for stable prices running on from
2013. In fact, prices increased by close to 10%. Looking
forward, pressure for wood fuel may cause prices to rise
a further 5% in 2015 through 2016 and possibly lifting
a further 5% in 2017 as a best case scenario, with more
modest rises of 2% through 2015/16 and 2% in 2017 as
our worst case forecast. The strong pound may also
affect board mills’ export volumes which may lead to a
slowdown in demand for SRW by these markets.
The standing sale trend is a combination of the
‘standard log’ index and SRW price growth trends using
the mean of the best and worst case scenarios
(Figs. 12, 13). Fig. 14 shows the impact of the different
combinations of logs to SRW in a standing sale parcel.
The spiralling value of SRW and our pessimistic forecast
on log price, is once again favouring parcels with a low
log content.
Fig 14. Combined Log and SRW Indices Forecast
Source: Forest Industry
Dec 2003 = 100
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
125
120
115
110
105
100
Combinations of LOG/SRW; yield dependent upon quality and average tree size
Fig 13. Forecast of SRW Prices
Value Growth
Index
Source: Forest Industry
220
210
200
180
170
160
150
Forecast Index
190
2003
2004
2005
2006
2007
140
LOG%/SRW%
130
120
110
100
2003
2004
2005
2006
2007
2008
2009
Worst case
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2010
2011
Best case
2012
2013
2014
2015 2016 2017
Actual
10
2008
2009 2010
70/30
2011
2012
40/60
2013
2014
2015 2016 2017
Update of key trend indicators
SRW and Green Log Price Development
Global Demand
Fig. 15 is an update of a trend analysis between log price
and small roundwood. The log index is the same as the
green log index in Fig. 10 and the SRW index is derived
from industry published data. It is clear that the trend is
for significant growth over the period in logs and SRW
with strong prices in 2014 for both product types. While
the log price to a large extent is determined by exchange
rates, the period of growth in 2014 can be attributed to
strong demand for home grown timber, despite the
strengthening pound, due in part to rising confidence in
the UK economy. The drivers behind the growth of SRW
continue to be the sustained increase in the wood fuel
market with new developments coming on stream and
increasing internecine competition for feedstock together
with rising demand in the traditional wood panel industry.
Fig 16. Global Solid Wood Product Demand m m3/pa
Source: RISI World Sawlog Study
400
350
300
250
200
150
100
50
0
99/03
180
170
160
150
140
130
120
110
100
90
80
2005
2006
2007
SRW
2008
2009
2010
2011
2012
2013
Western Europe
CIS and eastern Europe
Latin America
Africa
19/23
‘Going forward, global solid wood product
demand, now at record levels, will continue
to increase over the next 10 years by 1.9%
per year to average 896 million m³ per year
in 2019–2023. Growth in demand for solid
wood products will be shared proportionally
by Asia and North America. Demand in all
other global regions will expand but decline
as a share of world total demand. From a
product perspective, softwood lumber, which
is currently 42% of global solid wood product
demand, will experience the greatest growth
within the solid wood product sector, adding
73 million m³ over the next 10 years. MDF,
which is currently 11% of global solid wood
product demand, will be the second largest
source of growth, adding 26 million m³ over
the next 10 years. Plywood and particleboard will add approximately 19 million m³
and 17 million m³ to demand, respectively,
while hardwood lumber will add 9 million m³
by 2023.’
Price Development 2002 = 100
2004
14/18
Fig. 16 charts the rise in global demand of solid wood
products by region, to 2023, prepared by RISI in their
2014 World Sawlog Study, the narrative of which we
reproduce here.
Source: Forest Industry
2003
09/13
North America
Oceania
Fig 15. Log Price Development
2002
04/08
Asia and Middle East
2014
LOGS
Source: RISI 2014 World Sawlog Study
11
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For more information please contact:
Gordon Dugan at [email protected]
UPM Tilhill, Unit 4, Park Farm Courtyard, High Easthorpe,
Malton, North Yorkshire YO17 6QX. Tel: 01653 696083.
Peter Whitfield: UPM Tilhill, Kings Park House,
Laurelhill, Stirling, FK7 9NS. Tel: 01786 435000.
© published by UPM Tilhill 2015
The source of information and statistics where known to be published by other parties has been acknowledged.
No liability is accepted where acknowledgement has been omitted or overlooked. Opinions and recommendations published
in this bulletin (where no acknowledgement is made) reflect the views and interpretations of UPM Tilhill.
No liability can be accepted for consequential losses as a result of these opinions or recommendations.
UPM Tilhill
Kings Park House,
Laurelhill,
Stirling FK7 9NS
Tel: 01786 435000
Fax: 01786 435001
www.upm-tilhill.com
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