Post-Pandemic Revival In EU Joinery Manufacturing During 2021. ITTO Market Report 15th Sept 2022

After the dislocation caused by the COVID-19 pandemic, the performance of the EU27 wood joinery sector was transformed in 2021. The main long-term trends in previous years were a continuous increase in joinery production in Germany offsetting a large decline in Italy and wood’s loss of share to other materials – particularly plastics – in windows and doors manufacturing. However, 2021 saw a sharp revival in wood joinery activity across the continent. Following three years of stagnation, production value of wood joinery and related products in the EU27 increased 16% to €38.22 billion in 2021. Last year, in value terms, total wood joinery activity across the EU27 was at the highest since before the 2008 financial crises (Chart 1).

This is the main conclusion to be drawn from analysis of newly released Eurostat PRODCOM data which provides a snapshot of the production and consumption value of wood joinery products in the EU27 in 2021.

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In 2021, the impact in the COVID-19 recovery plans on long-term economic and social “resilience” was felt particularly strongly in the joinery sector. NextGenerationEU, the €750 billion ($888 billion) economic recovery instrument rolled out across the EU from 2021 in response to the pandemic, is explicitly linked to the EU Green Deal, a radical project to cut EU emissions by 55% compared to 1990 levels by 2030 on the way to making the EU climate neutral by 2050.

37% of NextGenerationEU finance is earmarked for achievement of European Green Deal objectives with activities including a large program of building renovation and support for the “circular economy” and sustainable investment. The projected costs of these Green Deal measures are enormous, requiring an additional €82 billion to €147 billion in spending every year until 2030, about half a percentage point of the EU’s GDP. Beyond 2030, the additional investments are 1% to 2% of GDP, about €4.6 trillion between 2031 and 2050.

Nowhere has the impact of these measures been greater than in Italy. In fact the effect is so strong that the Eurostat PRODCOM data for Italian door manufacturing in 2021 is so high as to suggest it may be exaggerated. For this reason it is not included in the EU-wide analysis (which it would otherwise distort) and is considered separately below.

Eurostat reports fivefold increase in value of Italian wood door production

According to Eurostat data the value of wood door production in Italy increased nearly five fold from €680 million in 2020 to €3.8 billion in 2021 (Chart 2). If accepted at face value, this would imply that Italy alone accounted for around 40% of the total value of all wooden doors manufactured in the EU last year. In terms of quantity, Italy’s production is recorded as increasing from just 2.4 million door sets in 2020 to 9.4 million door sets in 2021.

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There is, possibly, a legitimate explanation for such a huge increase in Italian wood door production. A key feature of Italy’s post-COVID support measures in the construction sector, partly financed through NextGenerationEU, was the so-called “Superbonus” scheme for building renovations. This was originally introduced in May 2020 as part of Italy’s ‘Relaunch Decree’ adopted in the wake of the pandemic. It aimed to boost the Italian economy by providing incentives aimed at improving building energy efficiency. The scheme allows homeowners to set 110% of the costs building renovation against tax, effectively allowing them to renovate at no cost. The scheme is due to end in 2025.

Given that Italian door production was at a level of around 10 million units per year in 2013, before declining during the long period of stagnation in Italy’s joinery sector to around 3 million units in 2019 before the pandemic, a production figure of 9.4 million units last year is just about conceivable.

This is particularly true when it is considered that replacing old doors with new modern energy efficient designs is probably one of the most immediately effective measures to reduce energy consumption in the existing housing stock. Indeed, this is the type of measure that led the EU to praise Italy’s Superbonus scheme for boosting the decarbonisation of the building sector, which is estimated to account for around 40% of energy use and 36% of CO2 emissions in Europe.

As of 31 July 2022, more than 220,000 renovation projects with a total value of €40 billion had been accepted under Italy’s Superbonus scheme, according to data from the Italian National Agency for New Technologies, Energy, and Sustainable Economic Development (ENEA).

The scheme had a “formidable positive impact” on the Italian economy, according to the National Council of Engineers (CNI). By the end of 2021, the subsidies contributed to the generation of more than €12 billion in Gross National Product (GDP) and the creation of 153,000 jobs, the association said in a study.

The Superbonus scheme, which likely lies behind the sharp rise in Italian door production, therefore has had some very positive effects. On the other hand, the extremely rapid rise in unit costs of wood doors in Italy last year hints at some potential problems due to such large subsidies. The average unit cost of wood door production in Italy last year was €404 per set, 70% more than before the COVID crises.

A significant increase in the costs of door production can be expected due to sharply rising costs of materials, energy, and other business since the start of the pandemic. However, the rise in the unit cost of doors in Italy is out of line with other EU countries. Last year, the unit value of a wood door produced in Italy was more than seven times the average (€57 per set) of wood doors produced in other EU countries.

This lends weight to comments by Prime Minister Mario Draghi to the European Parliament in May this year when he suggested that the Superbonus scheme had led to market distortions. “The cost of improving efficiency has more than tripled due to the 110% scheme. The prices of the investments needed to perform the renovations have more than tripled because the 110% eliminates the incentive to negotiate on price,” he remarked.

Slow and steady rise in German wood joinery sector

Last year’s rise in the value of joinery manufacturing in other EU countries, and in joinery sectors other than doors in Italy, was less dramatic but still significant. (Chart 3). The value of joinery production in Germany, which unlike other leading joinery manufacturing countries in Europe continued to grow in 2020, increased by 3% to €10.30 billion in 2021.

In all the other large joinery manufacturing countries there was a sharp increase in joinery production value last year following a decline in 2020. Gains were made in France (+23% to €5.14 billion), Austria (+23% to €2.99 billion), Poland (+16% to €2.51 billion), Sweden (+4% to €1.98 billion), Spain (+61% to €2.16 billion), Denmark (+53% to €2.05 billion), and the Netherlands (+6% to €1.20 billion). Production value of all joinery products other than doors in Italy increased 23% to €5.14 billion in 2021.

No sign of an increase in wood’s share of the EU door and windows sector

While wood joinery activity increased significantly last year across the EU, there is little evidence to suggest that wood products increased their overall share of the EU market for doors and windows. Eurostat PRODCOM data provides comparable data on the total value of doors and windows manufactured in the EU27 in wood, plastic, steel and aluminium respectively. This shows that the value of metal and plastic door and window production in the EU27 increased alongside production of equivalent products in wood (Chart 3).

The share of wood in the total value of EU27 door and window production was 27% in 2021, the same proportion as the previous year. The share of steel also remained the same last year, at 15%. The share of aluminium marginally increased, from 27% to 28%, while plastics share declined slightly, from 31% to 30%.

The continuing rise in aluminium follows a longer-term trend. Aluminium has always remained the default windows product in the commercial market but has enjoyed considerable resurgence within the residential window and door market. An important driver behind this has been aluminium bi-fold and sliding doors as consumers demand greater space and light within living areas. Another factor is the demand for lower maintenance and greater strength in light weight frames for high energy efficiency double and triple glazed units.

A limitation of the PRODCOM data is that it does not distinguish products made wholly in wood or metals from those that are composites of both materials. The development of wood-aluminium composite window frames has been a key growth area in the EU27 in recent years. These products combine the strength and efficiency of aluminium with the thermal insulation and aesthetic properties of wood.

EU market for wooden doors rebounds 12% last year

Eurostat PRODCOM data shows that the total value of wood doors supplied to the EU27 (excluding Italy) increased 12% to €6.50 billion in 2021 following a 1% decline the previous year. In 2021, 96.6% of the value of all new doors installed in the EU27 were manufactured inside the single market, only 3.4% were imported from outside (Chart 4).

Although the trend was generally upwards, there was variation in the performance of the wood door sector in EU27 countries in 2021 (Chart 5). Production in Germany increased 5% to €1.50 billion during the year, continuing an uninterrupted rise since 2009. Production in Spain rebounded very strongly, by 64% to €970 million in 2021 after a 10% fall in 2020. Production in France also rebounded, but less strongly by only around 4% to €700 million after an 8% decline in 2020. Elsewhere in 2021 there was a robust rise in wood door production in Poland (+16% to €700 million), Austria (+10% to €340 million), and Estonia (+20% to €230 million). Production fell in the Netherlands (-5% to €330 million), Sweden (-4% to €250 million) and Denmark (-9% to €200 million).

Following a 4% decline in 2020, wood door imports into the EU27 increased by 17% to €221 million in 2021 (Chart 7).

Total EU27 wood door imports from the tropics were €49.8 million in 2021, 21% more than in 2020. This compares to a 16% increase in imports from temperate countries to €172 million in 2021. The share of EU27 wood door imports sourced from tropical countries increased slightly, from 21.9% in 2020 to 22.5% in 2021. This redresses the loss of share during 2020 when tropical suppliers were particularly hard hit by rising freight rates and other supply problem in the early stages of the pandemic.

In 2021, wooden door imports from Indonesia, by far the largest tropical supplier, rebounded 31% to €42.5 million, after falling 8% the previous year. Imports from Brazil also rebounded, but by only 7% to €3.9 million after also falling 8% the previous year. In 2021, EU27 imports of wood doors fell sharply to negligible levels from Malaysia (-30% to €1.8 million) and Vietnam (-49% to €0.8 million).

EU27 imports of wooden doors from China, still the largest single external supplier, rebounded 19% to €59.6 million in 2021 after falling 14% the previous year. Imports from Ukraine increased 24% to €20.2 million in 2021 building on a 22% increase the previous year.

EU27 wood door imports from the UK fell 14% to €12.0 million in 2021 owing to changing distribution networks after the UK left the EU single market at the start of the year.

The European wood door industry is now dominated by products manufactured using engineered timber driven by requirements to comply with higher energy efficiency standards and efforts to provide customers with more stable products and long-life time guarantees.

Another key trend is towards composite doors with a steel-reinforced uPVC outer frame with an inner frame combining hardwood and other insulation material. These products are designed to combine strength, security, durability, high energy efficiency, with a strong aesthetic.

There may be a place for tropical hardwoods in the design of these products with manufacturers looking to combine high quality, consistent performance, regular availability, and good environmental credentials with a competitive price.

EU market for wood windows up 15% in 2021

The total value of wood windows supplied to the EU27 increased 15% to €6.59 billion in 2021 following a 4% decline the previous year. This was the first annual increase since 2017 in a market which had been effectively static since before 2008 financial crises (Chart 8).

Supply of wood windows to the EU27 is overwhelmingly dominated (over 99%) by domestic production which increased 15% to €6.54 billion in 2021. The strongest rebound was in Italy where the value of wood window production increased 38% to €1.35 billion after a 25% fall the previous year (although the scale of the rebound in the Italian windows sector may, to some extent, be inflated for the same reasons as in the Italian door sector).

Wood window production in Germany increased by 2% to €980 million in 2021, continuing a rising trend ongoing since 2018. Production in Poland increased 15% to €800 million after a 2% decline the previous year. Gains were also made in all other leading wood window manufacturing countries in 2021 including Austria (+13% to €550 million), Denmark (+16% to €510 million), France (+1% to €500 million), Sweden (+11% to €480 million), and the Netherlands (+11% to €310 million) (Chart 9).

EU imports of wood windows from outside the EU increased by 36% in 2021 to €51.2 million (Chart 10). Imports from Belarus, the largest external supplier last year, increased 26% to €9.7 million in 2021, continuing a rising trend that started in 2017. Imports also increased sharply from Bosnia (+170% to €9.1 million), and the UK (+107% to €8.5 million). However imports from Norway fell 16% to €6.1 million.

Only a tiny quantity of wood windows is imported into the EU from tropical countries. After a spike in imports of €7 million in 2015, mainly from the Philippines, imports from tropical countries fell to less than €1 million in 2019 and remained at that level in 2020 and 2021.

While tropical countries are not significantly engaged in the EU market for finished windows, this sector is of interest as a source of demand for tropical wood material. From this perspective, a notable long-term trend in the EU window sector – as in the door sector – is towards use of engineered wood in place of solid timber. This is particularly true of larger manufacturers producing fully-factory finished units that buy engineered timber by the container load.

Increased use of engineered wood is closely associated with efforts by window manufacturers to meet rising technical and environmental standards, provide customers with long lifetime performance guarantees and recover market share from other materials.

Increased focus on energy efficiency means that triple-glazed insulating window units with very low U-factors are now more common than double-glazed units in Europe. These units demand thicker, more stable and durable profiles that in practice can only be delivered at scale using engineered wood products or by combining wood with aluminium and steel in composite products.

The quality and engineering of wood windows has undergone a revolution in the EU in recent years so that manufacturers are now able to deliver products with many of the benefits previously reserved only for the best quality tropical hardwood frames using softwoods and temperate hardwoods.

Factory-finished timber windows are given a specialist spray-coated paint finish for even and durable coverage which might only need redoing once a decade. The lifespan of factory-finished engineered softwood frames is now claimed to be about 60 years, while thermally or chemically modified temperate woods can achieve around 80 years.

Nevertheless, smaller independent joiners producing bespoke products in low volumes still tend to rely on solid timber purchased from importers and merchants to manufacture window frames. Tropical woods such as meranti, sapele and iroko continue to supply a high-end niche in this market sector.

Sharply declining prospects for European wood joinery sector in the third quarter

Joinery sector activity in the EU27 was still quite high in the first half of 2022; the Eurostat manufacturing index for joinery (excluding flooring) indicated activity during this period at around 15% above the level prevailing in 2019 before the onset of the COVID pandemic. However, prospects for the rest of this year have declined sharply in the third quarter.

The S&P Global Eurozone Construction Total Activity Index was below the no-change mark of 50.0 for the fourth successive month in August and fell to 44.2 from 45.7 in July. The latest figure signalled the fastest decline in activity in the building sector since January 2021. The three largest euro economies all posted steeper contractions with Italy (41.2) seeing the fastest overall decline, followed by Germany (42.6) and France (48.2) respectively.

Broken down by sector, all three categories recorded faster and similar rates of contraction. Civil engineering registered the steepest decline, and housing the weakest, although the latter still posted the fastest drop in activity since May 2020.

Commenting on the latest results, Trevor Balchin, Economics Director at S&P Global Market Intelligence, said: “Construction companies in the eurozone endured a deepening downturn in August, with seasonally adjusted activity dropping the most than in any month since January 2021.

“Whereas the previous period of decline reflected COVID-19 restrictions, the latest downturn is being driven by a darkening economic outlook amid high inflation and uncertainty caused by the ongoing war in Ukraine. All three of the largest euro economies recorded lower activity, new orders, employment and purchasing in August.

“There was further evidence that cost pressures may have peaked but this failed to arrest weakening confidence in the 12-month outlook, which in August was the worst since the first COVID lockdown in spring 2020.”

The increasingly negative outlook in the construction sector reflects mounting problems in the wider European economy. A recent article in the Economist commenting on European prospects notes that “Every single warning light is flashing red. Russia’s war on Ukraine, an uneven recovery from the covid-19 pandemic and a drought across much of the continent have conspired to create a severe energy crunch, high inflation, supply disruptions—and enormous uncertainty about Europe’s economic future. Governments are rushing to try to help the most vulnerable. Amid the nervous confusion, there is broad agreement on one thing: a recession is coming”.

According to the Economist, quite how bad the downturn turns out to be depends on how the energy shock plays out, and how policymakers respond to it. At the end of August, energy prices reached once-unimaginable heights: more than €290 ($291) per megawatt hour (mwh) for benchmark gas to be delivered in the fourth quarter of the year (the usual pre-pandemic price was around €30); and more than €1,200 per mwh for daytime electricity for the same quarter in Germany (up from around €60). Because gas is the marginal fuel in most European electricity markets, it sets the price for power more broadly.

With energy costs so high and the outlook uncertain, both business and consumer confidence are declining sharply. Concern is heightened by the fact that Europe will almost certainly see the energy shock coincide with rising interest rates. According to the Economist “Having underestimated price increases along with many other of the world’s central banks, the ECB [European central Bank] is now determined to bring annual inflation back to its target of 2%, from the alarming 9.1% recorded in August. Economists therefore expect the ECB to try to buttress its inflation-fighting credentials with a substantial interest-rate rise in its next policy meeting on September 8th, possibly lifting rates by three-quarters of a percentage point”.

The Economist concludes “all this suggests that the European economy is certain to enter a recession, led by Germany, Italy, and central and eastern Europe. Analysts at JPMorgan Chase, a bank, expect annualised growth rates of -2% for the euro area overall in the fourth quarter of this year, -2.5% for France and Germany and -3% for Italy”.

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