COVID-19 and impact on world forest products trade
Friday 20 Mar 2020
In terms of Europe, Italy is a large market for sideboards (for the pallet industry); however, the Italian market is temporarily closed off to receiving shipments, and this is now impacting market options for many central European mills. And, with an overall lack of containers (they are stuck in Chinese ports), some export markets may see some temporary shortages. In addition, last week the Czech Republic closed its borders. On it goes as the pandemic unfolds.
The author was travelling in Europe in the first half of March (as it turns out, not a well-timed trip: he is now under a self-imposed 14-day quarantine) to investigate developments in the central European spruce bark beetle salvage program in terms of how it is improving the sawmill industry’s competitiveness and its position in export markets. The field work shows that sawmills in Germany and the Czech Republic have gained massive cost advantages due to a glut of dead spruce timber. However, there are other factors that make this an even more interesting story.
The scale of the beetle-damaged timber — which really must be seen to be understood — is staggering, and is concentrated in several specific areas (while remaining somewhat variable elsewhere). One thing of note was the quality of the beetle-attacked spruce logs — a big surprise after years seeing BC Interior sawmills processing 8- and 10-year-old dead logs. Essentially, European sawmills are processing logs that have just been attacked or killed.
These “fresh-killed” logs, which are harvested and processed at sawmills in the winter, are of excellent quality. In several cases, logs are of too high a quality for the U.S. market (it is better suited for an older, lower-quality log with more blue stain). So, while individual company strategies will be different, it generally appears that European lumber entering the U.S. market in any large way could be delayed until the warmer summer temperatures begin to yield lower-quality logs that better fit that market’s requirements.
One complication: Europeans face a shortage of containers that would otherwise be used to export lumber to higher-priced markets such as MENA. Since the United States uses break-bulk vessels, the shortage could precipitate an increase in exports to the U.S. market. The upcoming FEA report, Central European Bark Beetle and Wind-Damaged Timber will provide further details on a variety of topics, including the scale of the salvage program and its duration. Spoiler alert: the full answer is not what competitors will want to hear!
And, while the central European sawmilling industry has a major log-cost advantage, German lumber producers have been facing some challenges. This was clearly outlined by industry veteran Carsten Doehring in his market assessment published in Timber-Online.net (Vienna, Austria). He explains that the weaker performance of German sawmills in the second half of 2019 (versus the first half) was certainly not tied to the availability or price of raw materials. Instead, a glut of wood waste (sawdust and chips), changing wood qualities, and resulting lower sawn timber prices combined to create the situation.
Wood waste is a much bigger cause for concern among sawmills, in fact. Both the engineered timber and paper and pulp industries have serious problems, as shown by their declining production indices. On top of that, there are enormous volumes of industrial logs from areas affected by various beetle and storm calamities; these will keep future sales of wood waste a “problem child” for sawmills. Looking ahead, we should see further investments in pellet plants and new approaches to a wood-based bioeconomy.
Fueled by the quality of log wood from calamity-struck areas, sawn timber sales to Asia (India, Taiwan and South Korea, but not China) also continued to grow in 2019. In view of the quality of the beetle-killed logs, these Asian markets are of crucial importance to German sawmills — yet they are also especially at risk from COVID-19. The logistical challenges involved in reaching other markets are huge, so global trade flows are poised to change significantly in the coming weeks.
We expect markets to remain volatile and uncertain for the next few months. All major producing regions are searching for markets for their lumber amid evolving geopolitical obstacles, trade barriers and logistical challenges that continue to pop up. As demand slows or becomes disjointed, expect to see lower lumber prices as mills continue running, with curtailments occurring too late, i.e., after prices get too low, reflecting the usual boom and bust cycle of the lumber business.
Source: Russ Taylor, Managing Director, FEA-Canada
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