Forest Industries Intelligence

Economic problems continue to mount in Europe. The UK, Spain and Ireland were hit hard early on by the collapse of their respective property markets. The UK’s economy, with its heavy dependence on financial services, has also suffered more profoundly than other economies from the crises in the banking sector. Now contagion has set in and conditions are deteriorating rapidly throughout the EU.

Short term prospects for the European hardwood sector appear very poor. Hardwood consumption has been hit by serious economic disruption resulting from the bursting of the property bubble and associated credit crunch. This has created a vicious downward spiral as lack of credit to businesses and individuals is now causing severe cash flow problems and reducing economic activity further, contributing to rising levels of unemployment, higher debt default rates, and further falls in consumer spending. Media reports highlighting these problems are helping to reinforce and deepen negative sentiment. It should be said, however, that the world keeps turning, there is economic activity and wood is being consumed. Although the market is extremely competitive, those with the right stock at the right price are finding buyers.

The US trade journal Hardwood Review Global provides a flavour of current depressed market conditions for hardwoods within the EU. In their November issue they note: “one major exporter said that hardwood demand in every European market – from the United Kingdom to Scandinavia to Germany to the Mediterranean – has been hurt by the economic downturn. European buyers were purchasing only enough lumber to fill gaps in inventory, and most were shopping around to get the best specifications for the lowest prices”. Hardwood Review Global go on to note that Italy’s export oriented furniture industry is suffering severely in the economic downturn, while the poor housing market has had a particularly profound impact on the Spanish and Portuguese door and window manufacturing sectors. Belgian importers are reporting that their purchases are down 40% compared to last year.

Overall economic conditions in the EU have continued to deteriorate. According to figures published on 14 November which showed that the euro-area economy shrank in the third quarter following a similar decline in the three months to June, the region is now technically in recession. This is the first time that GDP growth across the area has fallen in successive quarters since the euro was launched in 1999. Overall GDP in the euro-area has grown by 0.7% this year, with all the growth concentrated in the third quarter. Germany and Spain have performed slightly better than the euro-area average, France has done a little worse. Italy stands out as the worst performer – its GDP is down 0.9% on a year ago. Meanwhile unemployment has jumped in Spain and Ireland, the two countries hardest hit by the property bust and scarcity of mortgage credit. On this measure Germany has performed reasonably well, unemployment in the country having actually fallen slightly this year.

The European hardwood import trade is now very focused on stock reduction and receiving delivery of outstanding contracts. While hardwood stock levels across the main European markets have been whittled down during the course of 2008, the general view is that they are still adequate to meet current very subdued levels of demand.

Widely reported measures by national government’s to bail-out failing banks, involving a massive injection of state money amounting to partial nationalisation of leading retail banks in several countries, has quelled the worst fears of European investors and depositors of an imminent and disastrous economic collapse. Steps have also been taken to kick-start national economies through a significant reduction in interest rates by several central banks including the euro area’s ECB and the Bank of England in a move co-ordinated with the American Fed. Nevertheless, economic confidence in Europe has taken a severe beating over recent weeks, a fact reflected in weakening currencies and forecasts that Europe may be facing its worst recession since the early 1990s.

The on-going financial crises across Europe and the housing market bust in several key markets including Spain and the UK have dented confidence amongst European hardwood buyers. While hardwoods remain a fashionable product in the EU, valued for their quality, aesthetic appeal and natural warmth, overall levels of consumption are falling as the market has shrunk, and as more buyers look for ways to cut costs. Trade contacts indicate that demand did not pick up in September as is usual after the summer vacation period. Meanwhile on-ground sales prices for headline tropical species such as sapele and meranti are below replacement cost as importers’ main concerns have been to off-load existing stocks and maintain cash flow rather than to consider the possibility of future short falls.

Newly released trade data reinforces anecdotal reports of a significant slowdown in Europe’s hardwood imports from tropical countries this year. However the news is not all bad. There has been growth in imports of some commodities into a few countries. Plywood imports from tropical countries increased significantly in the second quarter of 2008. In addition EU imports of hardwood flooring have been rising this year.

Reports from the EU sawn hardwood market are generally gloomy. Signs are that importers have returned from their summer vacations in a very cautious frame of mind, no doubt influenced by the release of yet more data to indicate that economic growth is slowing. Generally European agents report that both sales volumes and profit margins are down. Importers are focusing heavily on getting the best deal possible, closely scrutinising specifications and bargaining down prices. This is despite the fact that on-ground stocks of many hardwood specifications are no longer particularly high while available supply in the major producing regions is not great. Agents suggest that even a minor uptick in demand in the EU could soon lead to shortages as overseas producers would be unable to respond quickly enough. Agents are concerned that the European hardwood trade, having bought too much forward last year, may now respond by buying too little too late this year.

A report in the Economist suggests that European economic prospects are deteriorating. It notes that “Europe is struggling to stay above water. Figures released on August 14th showed that the euro-area economy shrank at an annualised rate of 0.8% in the second quarter, the first such reverse since 2001. Nor are things likely to improve soon. A closely watched survey of purchasing managers in manufacturing and services slumped in July to its lowest level since 2001. Business confidence has turned down sharply in all of the three biggest economies in the euro area: Germany, France and Italy. Indeed, in the second quarter GDP fell in all three countries, paring their annual growth rates…Meanwhile Spain’s GDP has predictably stuttered as it endures a painful shock from its burst housing bubble…Ireland’s GDP which grew by 6% in 2007 is likely to shrink this year… Britain is on the brink of recession.”