Tropical hardwood market insights from the UK. ITTO Market Report 15th November 2022

The September meeting of London Hardwood Club included a series of presentations on the hardwood market situation in South America, Africa and Southeast Asia, alongside discussion of European and North American hardwoods.

Ken Walsh of Danzer reported on the market situation for West African hardwoods. After two very good years of trading, supply is now quite limited overall and the rising cost of crude oil is becoming an issue and causing increases in both shipping and production costs. Shipments from the port of Douala are delayed due to ongoing problems surrounding the dredging of the estuary to allow larger boats to access the terminals and boats are skipping the port causing more delays.

Mr Walsh also referred to delays in obtaining the correct documentation and certificates for exporters in Cameroon and production delays due to routine sawmill equipment maintenance. He forecast that prices for West African hardwoods should stay firm into this Autumn, with little chance of over production in the coming months and supply remaining tight.

Frank Cosentino of Tradelink reported on the Southeast Asian market, highlighting shortages of supply from Indonesia since the beginning of this year. Replacement costs are up due to increased production costs associated with labor and tight supply. Sea freight rates have started to fall from their peaks of around $17,000 per 40ft container (compared to a pre covid average of around $1,500).

Mr Cosentino said that availability and shipments of Meranti eased in June of this year but, in the European market, this species is now a relatively small volume specialist timber product in comparison to years gone by. Balau decking shipments have become more regular but GBP prices are now higher due to weakness of the GBP rate against the USD.

Hank Marchal of the US-based Robinson Lumber Company spoke about production and supply from South America. He said that production has exceeded demand in the most popular commercial species like Ipe and Cumaru. He noted that overall tropical hardwood production in South America has started to slow and that mills are now concentrating on satisfying demand in their domestic markets. This is partly because sea freight rates from South America continue to rise and availability of container ships calling into ports for loading in the region has reduced.

On the European market for North American hardwoods, Mr Marchal said that during the second quarter this year the USA exported large volumes into Europe with the UK taking the most volume. In particular, shipments of White oak and Tulipwood were up some 40% in comparison to the same period in 2021. After shortfalls in supply last year, North American sawmills and exporters caught up quickly this year with existing and older contracts and there was more space available on container ships leaving the East Coast USA for Europe.

Mr Marchal said that as a result of the extra volumes of North American hardwoods all arriving into Europe in a relatively short time frame, the summer holiday season on the continent and a slowdown in demand, prices have now come down as sawmills started to discount to stimulate sales. In some sizes (4/4 mainly) price reductions have been sharp and come in a relatively short time frame. Thicker sections (6/4 and up) seem to be less affected due to longer time in the dry kilns.

Mr Marchal suggested that North American producers have come to accept they will take a ‘hit’ on current inventory. However, production will fall if profit margins do not improve. Therefore sawmill volumes will likely be reduced in North America in line with demand. Log prices are also likely to fall as other production costs continue to rise (labour & transportation) and sawmill margins are being squeezed. He noted however that North America is not seeing the same steep rises in energy prices as in the UK and across Europe.

Rupert Walker of Timber Link International reported on the market for European hardwoods. He observed that there are shortages of White oak logs across Europe. The current situation in Ukraine (which was the 2nd largest producer of White Oak behind France) is adding to the supply shortage. As a result European manufacturers and buyers are looking for alternative sources of supply.

Mr Walker also said that French sawmills are facing large increases in log prices going into this Autumn. Mills are also facing rising production and drying costs due to increases in energy prices and staff shortages and higher labour costs. Road transport prices are on the rise throughout Europe. He noted strong demand for Croatian white oak despite log prices increasing by around 25% in the country. European Ash is still trying to find its place in the market as an alternative to American ash which is now less readily available, partly owing to the ash borer epidemic, and European Beech prices and supply are stable.

Emerging hardwood market challenges and opportunities in Europe

The sawn hardwood trade in Europe experienced a period of unprecedented demand and good margins in 2021 and the first half of 2022. Growing recognition of the environmental benefits of hardwoods, particularly with a rising focus on zero carbon commitments, also implies strong long term prospects for hardwood products in the region. However short-term market prospects are clouded with uncertainty against the background of sharply rising inflation and declining business and consumer confidence. There are also serious concerns about long-term supply, particularly of oak, due to the volatile geopolitical situation, impact of climate change on European forests, and rising log exports to other regions.

These are the main insights from the International Hardwood Conference held on 28th of October in Lyon, France, and organised by the French National Wood Federation (FNB), the European Organisation of the Sawmill Industry (EOS) and the European Timber Trade Federation (ETTF). This event gathered around 100 industrialists, traders, and experts of the sectors to discuss market trends, with a focus on the shortage of raw material availability and impact of skyrocketing energy costs for hardwood industries in Europe.

Maria Kiefer-Polz, President of the Hardwood section, presented the point of view of European hardwood producers. The EOS Hardwood members expect a sawnwood production decline of at least 3% this year following a double-digit increase in 2021. After a good 2021 and a bright first half of the year 2022, demand has slowed over the last few months and production has adapted to weakening sales, both in home European markets and in overseas markets. The situation at present is quite challenging with high energy prices taking a toll on the industry, particularly in the more energy-intensive beech sector. Hampered by high inflation and increasing mortgage rates, demand from European consumers is now much weaker. Stocks at sawmills are high and many producers expect a difficult few months ahead. Lack of labour is also reported by many countries.

According to Ms. Kiefer-Polz, this challenging situation is compounded for European sawmills by increasing export of oak logs, partriculaly to China. Exports of European oak logs to China have been increasing for many years and that China’s appetite for European oak sawlogs continues to grow. This is particularly the case now that Russia has implemented a log export ban, increasing China’s reliance on imports from Europe. Of China’s total imports of oak logs of 1.35M m3 in 2021, 52% derived from the EU. China’s imports of oak logs from the EU increased from 561,000 m3 in 2020 to 702,000 m3 in 2021. Imports from EU in the first nine of this year were 689,000 m3, a 30% increase on the same period in 2021. So far this year, over two thirds of total Chinese imports of oak logs have been sourced from the EU.

Ms. Kiefer-Polz suggested that the current level of oak log exports from Europe is unsustainable. As a result EOS together with the European Furniture Confederation (EFIC), the European Panel Federation (EPF), the Italian umbrella association Federlegno , and the European Parquet Federation (FEP) have joined forces to form a coalition with the advice of a legal study to consider options to reduce oak log exports.

The coalition is working with DG Trade of the European Commission. However, according to Ms. Kiefer-Polz the EC is reluctant to put in place any formal trade restrictions for several reasons. First, there is concern about a risk of retaliation as China could impose measures in response to such action by the EU. Second, the EU has itself challenged at the WTO and in bilateral discussions log export bans introduced by many neighbouring countries. If the EU put in place a similar log export ban, that would be inconsistent with its own actions on this issue.

DG Trade has also pointed out that the rise in European log exports is a market outcome that, while bad for the European woodworking industry, is good for forest owners. By selling into a large global market, European forest owners achieve better prices for their logs. For these various reasons, EC DG Trade are advising the European woodworking sector to negotiate and find solutions locally with forest owners, according to Ms. Kiefer-Polz.

The presentation by Aymeric Albert of the French Forestry Office (ONF) which focused on the impact of climate change on French hardwood resources, strongly implied that rising log exports and obstacles due to the war in Ukraine are not the only reasons for declining hardwood log availability in Europe. There are also major long-term changes in the forest resource driven largely by climate change that imply long term reductions in hardwood log availability in some parts of Europe.

The figures provided by Mr Albert on declining availability of good quality logs in France were startling. During the five year period between 2017 and 2021, the total harvest volume of healthy hardwood trees in French forests fell from 7.8M m3 to 6.6M m3, while harvest volume of sanitary products increased from 433,000 m3 to 1.41M m3.

The damage to hardwood stands is largely attributed to climate change, which is driving drought conditions that stress trees, making them more vulnerable to insect damage and leading to more frequent wildfires.

The volume of oaks designated for harvest in French public forests decreased from 2.1M m3 at the end of 2017 to 1.8M m3 in October 2022. In contrast the volume of dying oaks increased from 170,000 m3 to 330,000 m3 in the same period. Similarly for beech, the total volume designated for harvest in public forests decreased from 2.9M m3 at the end of 2017 to 2.5M m3 in October 2022 while the volume of dying beech increased from 155,000 m3 to 580,000 m3 in the same period.

For hardwood species other than oak and beech, Mr Albert explained that the level of die-back had strongly increased through successive droughts, rising from 283,000 m3 in 2018 to 602 000 m3 in 2021. Hardwood species such as ash are dying from a fungal disease of the same nature as Dutch Elm disease so they’re expecting a complete die-back within the next ten years.

On future prospects Mr Albert said that the total hardwood harvest in France will remain “cautious” and that French forest policy is now focused on efforts to increase stand stability over time. The aim is to rely where possible on enhanced natural regeneration, while introducing new species or new provenances to increase forest resilience where necessary. He closed by saying that a decline in the availability of wood from French forests, both in terms in quantity and quality, will become the norm and the wood sector must adapt to it.

With domestic hardwood supplies under pressure and strong demand on the consumer side, Ad Wesselink, Hardwood President of the European Timber Trade Federation noted that European imports of sawn hardwood were rising in 2021 and the first half of 2022. EU27+UK imports of sawn hardwood were up 6% at 1.15 million m3 in the first 6 months of this year, after rising 13% to 2.2 million m3 the previous year. There has been particularly strong growth in imports of sawn tropical hardwood. At the same time, Mr Wesselink stated that about 22,000 tons of oak is missing from the EU27+UK market due to cessation of imports from Russia and Belarus. This combined with increased logistical and energy costs has led to sharply increasing prices. On the bright side, Mr Wesselink echoed Ms. Kiefer-Polz in stressing the undeniable recognition of wood as an environmentally friendly construction product. Increased market share for wood might help compensate the expected slowdown in the construction market.

Michael Snow, presenting from the vantage point of North American producers, reported a slowdown in economic growth in China, with a housing market that is rapidly declining having a direct impact also on the selling of furniture. Mr Snow commented as well that the new deforestation free products Regulation, discussed right now at EU level, if introduced in its current form, “would effectively eliminate American Hardwood from the EU markets, due to extreme challenges of implementing the geolocation requirement in those situations where forests are both highly diverse and in the hands of numerous smallholders”. While AHEC is very supportive of this new EU legislation, since it targets agricultural products which are by far the main drivers of deforestation, it is advocating that the geolocation definition be adjusted in the final legislation. According to Mr Snow, products should be identified to a specific low risk jurisdiction, rather than to an individual real-estate property which is the current requirement, when dealing with diverse hardwoods from smallholders.

James Xu showed that neither the US nor Europe is the leading hardwood lumber exporter to China because other regions took advantage: China now imports large volumes of wood from Russia and Thailand due to lower costs. At the same time, Mr Xu, stressed that not only costs influence consumers’ decisions, but “fashion” is also a key factor. Business opportunities might instead be found on the Indian market, as highlighted by Dr Michael Adams of ITTO: “The Indian economy grew at a stunning 13,5% year on year in the second quarter of 2022. Growth prospects remain sound and the large companies are continuing to invest while the building material market is expected to grow in the coming 5-6 years”.

The European parquet market, as presented by Mr Lorenzo Onofri, was good in 2021 (+6.2% compared to the previous year) but already started to decline in 2022 reflecting decreasing consumer confidence (war, energy prices, and lack of affordable oak and birch plywood – mainly coming from Russia). The EU parquet producers (represented at EU level by FEP) alongside other associations, is calling for limits to be placed on oak log exports from the EU. Due to the lack of oak and birch plywood, the parquet industry is searching for new sustainable raw material substitutes, while they continue investing in the REAL WOOD initiative to convince the consumers to use real wood flooring and not artificial products that pretend to be made of wood. Sharing the same challenges of the parquet industries, the European furniture sector, as reported by Mr De Jaeger, is expecting a further market slowdown in 2023 with increased challenges for raw material procurements and prices expected to increase.

To conclude, as emphasized by most speakers, the hardwood industries can benefit from the positive environmental value of wood products as increasingly recognized by European policymakers and consumers alike. At the same time, the sector needs to find new markets and opportunities: some hardwood species are under-utilized, and forests will potentially supply more of the species which are ‘minor’ at present. In this sense, research and the development of standards for new applications of hardwood products will be key for the sector in the coming years.

The next International Hardwood conference will take place in Vienna, Austria, in 2024.

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