Subdued Mood Amongst Hardwood Traders At Interzum. ITTO European Market Report 15th May 2023

The general mood of hardwood traders attending the Interzum 2023 show in Cologne 9 to 12 May was that the overall market, having slowed dramatically in the second half of 2022 has remained very subdued this year. There were many references to economic uncertainty owing to the Ukraine war, extremely high energy costs, rising inflation leading in turn to higher interest rates, and consumers becoming increasingly cautious after two years of high spending immediately after lockdowns. The boom in home improvement that started in the pandemic and helped drive hardwood sales in Europe, and which was encouraged by government stimulus measures, is now well and truly over.

This informal view chimes with the formal economic analysis of organizations like the IMF whose latest Regional Economic Outlook report for Europe published in April notes that “Europe faces the difficult task of simultaneously bringing down inflation, sustaining economic growth, and preserving financial stability, as it grapples with the fallout of the energy crisis triggered by Russia’s invasion of Ukraine and the aftermath of the COVID-19 pandemic. While declining, inflation remains very high. Growth has tumbled since the middle of last year as inflation lowered households’ real incomes”.

Many hardwood importers in Europe were caught out by the sharp fall in prices for some hardwood products, including from South East Asia and North America, and for lower grades of European hardwood, starting from the summer of last year. The price drop was driven by the sharp fall in global demand last year as all the major economies – including the US, China and Europe – suffered a downturn. The global freight rate index (as reported by Statista) fell from a high of $10,361 for a 40 ft container in September 2021 to $2,119 in December 2022. On some routes the fall was even greater, for example one UK importer of Asian plywood said the fall from South East Asia into the UK fell from a high of $18,000 to just $1,800 during this period.

As prices fell on global markets, hardwood importers in Europe that had bought heavily in the first half of 2022 found that they were now carrying a lot of overpriced stock that was increasingly difficult to sell. Over the last six months, importers have been slowly offloading that stock to maintain cashflow but frequently at a loss.

While that is the general picture, the situation has varied widely throughout the hardwood trade in Europe and dependent on the species and end-sectors involved. The problems of high stocks of overvalued products particularly apply, in the case of tropical hardwoods, to Indonesian products including bangkirai decking and laminated window scantlings, and in the case of temperate woods, to American hardwood, and flooring grades of European oak.

In the case of African sawn hardwood, although prices for existing landed stock in Europe have been falling as large volumes arrived last year and consumption has been slow, availability for forward orders from African sawmills in the second half of this year is restricted and prices are firm and expected to remain so. This reflects rising overheads for African producers, driven by fuel and energy inflation, which is resulting in falling output.

An increase in Cameroon’s export tax from 10 to 15% of the FOB value of sawn timber has also contributed to firmer prices for forward orders.

After all the work carried out on garden improvement during the pandemic, the European market for tropical hardwood decking has now slowed to a crawl. European importers are carrying heavy stocks bought at high prices last year and are not in the market for new supplies. With demand so weak, exporters in Malaysia and Indonesian have struggled in their efforts to push for higher FOB prices in response to lower harvesting and production volumes.

The volatility in prices for American hardwoods in the last two years months has impacted on demand for those tropical species where there is direct competition. The most obvious overlap is in the market for tropical species like ayous, okoume and abura/bahia which compete directly with American tulipwood for interior joinery and furniture applications. Prices for American tulipwood rose sharply between 2020 and early 2022, but then fell sharply from the middle of last year. Ready availability of the American species at low prices is now acting as a further drag on demand for the tropical timbers in Europe.

The extent to which applications for American hardwoods and tropical hardwoods overlap in the European market is increasing as production volumes of thermally modified American hardwoods suitable for external applications continue to rise. Ash was formerly preferred for thermal modification, but with production volumes of that species declining sharply due to the Emerald Ash Borer infestation in the U.S., attention has now switched to red oak and tulipwood.

According to reports from traders at Interzum, the European market for wood furniture and flooring is particularly slow. There were some positive reports of reasonable activity in the windows and doors sectors in parts of the continent. Overall anxiety about future prospects seems particularly pronounced in Germany and in some central European countries most directly affected by the war in Ukraine. Some more positive reports came from traders operating in Italy, Spain, France, the Netherlands, and Ireland. Reports from the UK were very mixed, the overall impression being of a very slow start to the year but with rising optimism that the worst of the downturn is already over. Gaps are beginning to appear in UK stocks and more importers are taking steps to fill these.

This mirrors wider economic data. On a positive note, the IMF Regional Economic Outlook report notes that an all-out recession was avoided in Europe this winter thanks to sharply lower energy prices and government relief measures. The expectation is that the continent’s economy will continue to grow at the slow pace of 0.7% this year, rising to 1.4% in 2024 due to “gradually easing headwinds” with lower energy prices, easing supply bottlenecks, improving household purchasing power, and “some unwinding of the tightening of financial conditions later next year”. This year GDP is forecast to grow by 1.5% in Spain, by 1% in the Netherlands, by 0.7% in Italy and France, and by 5.6% in Ireland. However, GDP in Germany and the UK is expected to decline this year, by 0.1% and 0.3% respectively.

Construction sector data indicates weak prospects in Germany

Latest data from the construction sector suggests that prospects in Germany are particularly weak at present. The HCOB Purchasing Managers Index (PMI) for German construction stood at only 42.0 in April, down from 42.9 in March and well into sub-50 contraction territory, registering the deepest downturn since February 2012. France is also weak on this measure, the HCOB PMI posting 46.0 in April, which at least was marginally up on 45.3 in March. More positively, Italy posted 49.0 in April, up from 47.4 in March and now close to neutral.

In the UK, the construction sector is performing better than the wider economy. At 51.1 in April, the S&P Global / CIPS UK PMI was up slightly from 50.7 in March and above the neutral 50.0 value for the third month in a row. New build residential activity is very slow in the UK but this is being offset by a reasonable level of commercial building work which is creating continuing demand for hardwood for joinery applications.

German woodworking trade fairs underway

Interzum and LIGNA, Europe’s two biggest wood-working shows, are now being held in Germany. Running back-to-back, Interzum was held between 9th and 12th May in Cologne and LIGNA is on between 15th and 19th May in Hanover. Koelnmesse, the organizers of Interzum, reported that there were just under 1600 exhibitors at this year’s show, down from around 1800 when the show was last held in 2019 but a good turnout given current uncertainties in the furniture and joinery market.

Interzum is a truly international fair with around 80% of exhibitors based outside Germany. A huge range of wood materials suppliers and manufacturers exhibit at the show, covering the full range from lumber and veneer through furniture and flooring component manufacturers to finished furniture products.

The central importance of wood to the European furniture and interiors sector was celebrated in Interzum’s prepublicity which highlighted that wood materials play a “special role in current interior design trends because of their natural appearance. The structures, shapes and colours found in natural wood define many new collections of decorative finishes and surfaces”. It went on to observe that “this natural building material can also address issues such as CO2 emissions in the residential sector, the lack of living space and the desire for individual and healthy furnishings. As a renewable, carbon-neutral material, wood plays a major role especially in lightweight design and furniture construction.”

While the wider wood sector was a dominant presence at the show, tropical hardwoods were not prominent. This is partly a reflection of the relative lack of resources devoted to communication and R&D in the tropical wood sector, and partly to the existing position of tropical wood in the European market, where it is essentially seen as a niche material for a narrow range of applications. However, there was a presence in the shape of tropical plywood producers such as Rougier and Joubert and several larger European importers of sawn hardwood and veneer manufacturers that offered tropical wood in their product ranges.

Indonesia hosted a stand to promote the SVLK certification system and featuring a range of lightweight timber products for the wood flooring and furniture sector. The Ambassador of Indonesia to Germany, H.E. Arif Havas Oegroseno, delivered a presentation explaining the role of SVLK at the Indonesia stand on 10 May. Indonesia’s presence at Interzum was arranged through a collaboration between Indonesia’s Directorate General for National Export Development, the Indonesia Trade Attache in Berlin, the Indonesia Trade Promotion Center (ITPC) in Hamburg, and LPEI Indonesia Eximbank. It was supported by Germany’s Import Promotion Desk (IPD) and the Swiss Import Promotion Programme (SIPPO).

Another positive outcome of Interzum 2023 for the tropical wood sector was the powerful case made for the social and environmental benefits of using tropical hardwood in high value applications in Europe and the wider global market at a well-attended event on the “Trend Stage” by Axel Groh of Schorn & Groh, a high-end German veneer manufacturer. Mr Groh emphasized the benefits of selection harvesting of high value timber in the tropics to maximize value and reduce incentives for forest conversion. He said that certification programs like FSC and PEFC combined with legal frameworks such as EUTR and the forthcoming EU Deforestation Regulation provide robust assurances that tropical wood sold into the European market is legal and sustainable.

Referencing increasingly widespread problems of pest and drought damage afflicting monocultural plantations in Germany and other European countries, Mr Groh also argued convincingly in favor of a shift towards low intensity forest operations favoring high value hardwood products from more diverse forests.

The strong environmental focus of Mr Groh’s presentation and Indonesia’s presence at Interzum aligned with the wider theme of Interzum this year. According to the event organizers “with its new global lead theme neo-ecology, Interzum 2023 is promoting the dialogue aimed at increasing more resource conservation and climate protection”. Aspects such as resource efficiency, smart materials, renewable energies and recycling and upcycling were key to many of the exhibitors’ innovations.

Since tropical wood products already exhibit many of these strong environmental features, for tropical suppliers the key challenge at Interzum 2023, and in the wider European market, is to more effectively communicate high levels of technical end environmental performance. The approach adopted by Rougier, for example, was to feature three innovative branded plywood products at Interzum – okougreen, ozigreen, and andougreen – respectively manufactured from 100% okoume, 100% ozigo, and 100% andoung – each supported by a technical sheet detailing performance and conformance to relevant quality and environmental standards.

For other sectors, the show highlighted the strong focus on development of new materials and processes that will contribute to the development of a functioning circular economy. Interzum’s “Sustainability Matters” exhibit featured a wide range of innovations designed to deliver against this objective – some involving new ways to use wood fiber, but many others involving novel use of faster growing plants and upcycling of agricultural and post-consumer waste products.

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